RBI slashes Cash Reserve Ratio to 4%: What it means for banks and you

RBI governor Shaktikanta Das said that the CRR reduction will release Rs 1.16 trillion into the banking system, providing additional liquidity and enable banks to extend more loans

Reserve Bank of India (RBI) governor Shaktikanta Das announced a 50 basis point reduction in the Cash Reserve Ratio (CRR) to 4 per cent during the monetary policy (MPC) address on Friday, December 6. The cut, which will be implemented in two phases of 25 basis points each, will take effect on December 14 and December 28.

 

The central bank governor said that the CRR reduction will release Rs 1.16 trillion into the banking system, providing additional liquidity. Governor Das noted that this move aligns with the central bank’s neutral policy stance, reflecting a balanced approach toward managing liquidity while ensuring economic stability.

 

This marks the first CRR cut in over 4.5 years. Das stated that the decision underscores the RBI's intent to ease monetary policy without altering the repo rate.

 

What is the Cash Reserve Ratio? 

The Cash Reserve Ratio is a key monetary policy tool that requires banks to maintain a certain percentage of their total deposits as liquid reserves with the RBI. Currently set at 4.5 per cent of a bank’s Net Demand and Time Liabilities (NDTL), this means that for every Rs 100 in deposits, banks must keep Rs 4.50 with the RBI.

 

The primary objectives of the CRR include liquidity management, ensuring that banks can meet depositor demands and maintain stability in the financial system. By adjusting the CRR, the RBI influences the amount of money available for lending, which can help control inflation or stimulate economic growth.

 

Periodic adjustments to the CRR allow the RBI to respond dynamically to changing economic conditions, making it an essential tool for managing monetary policy in India.

 

How will a CRR cut impact customers? 

The 50 basis point reduction in CRR is expected to inject Rs 1.16 trillion into the banking system. This surplus liquidity could enable banks to extend more loans, which may help spur economic growth.

 

The decision comes amid tight liquidity conditions in the banking system and a decline in GDP growth, which slowed to 5.4 per cent in the July-September quarter of 2024 — a seven-quarter low. The CRR cut signalled the RBI’s commitment to supporting economic growth while maintaining its policy stance, Das noted.

 

MPC holds repo rate steady for 11th time 

The monetary policy committee (MPC) opted to maintain the policy repo rate at 6.5 per cent for the 11th consecutive meeting, with a 4:2 majority. The three-day monetary policy review began on December 4.