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The Reserve Bank of India (RBI) could start using the Cash Reserve Ratio (CRR) as a regulatory intervention tool rather than just a liquidity management mechanism in the future, according to a recent report by State Bank of India (SBI).
The report emphasised the urgent need for the central bank to revisit its liquidity management framework, suggesting that CRR could serve as a countercyclical liquidity buffer rather than a frequent adjustment tool for daily liquidity needs.
Currently, the RBI manages liquidity through multiple measures such as Open Market Operations (OMO), the Cash Reserve Ratio (CRR), and the repo rate. However, the SBI report argues that CRR should be used strategically to regulate liquidity based on broader financial conditions rather than immediate liquidity adjustments.
What SBI’ report say?
The report suggests that the RBI should reposition CRR as a countercyclical liquidity buffer, enabling it to control liquidity without frequent adjustments. SBI believes the Weighted Average Call Rate (WACR)—the overnight borrowing rate between banks—does not fully serve its purpose as a policy tool and should be reviewed.
The report estimates that in FY26, the ownership of government securities (G-Secs) will remain stable, but there could still be a liquidity gap of Rs 1.7 trillion due to open market operations. This suggests that RBI may need additional liquidity measures to ensure smooth financial operations.
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The report predicts that the RBI could cut the repo rate by 25 basis points in its February 2025 policy meeting, with a total reduction of at least 75 basis points over the entire easing cycle.
What is the Cash Reserve Ratio (CRR)?
The Cash Reserve Ratio (CRR) is the portion of a bank’s total deposits that must be kept as cash reserves with the RBI. This cannot be used for lending or investments and serves as a monetary policy tool to regulate liquidity.
The higher CRR reduces the money supply and helps in controlling inflation while the lower CRR increases liquidity and encourages banks to lend more.
How does the RBI manage liquidity?
The RBI regulates liquidity in the banking system using tools such as:
Cash Reserve Ratio (CRR) – Minimum cash reserves banks must hold with RBI
Statutory Liquidity Ratio (SLR) – Minimum reserves banks must hold in government-approved securities
Open Market Operations (OMO) – Buying/selling government securities to control liquidity
Repo Rate – The rate at which banks borrow from RBI
Reverse Repo Rate – The rate at which banks park excess funds with RBI
Marginal Standing Facility (MSF) – A short-term borrowing window for banks
By adjusting these measures, the RBI ensures that the banking system has adequate liquidity while preventing excess inflation or economic slowdown.
With SBI’s report signaling potential policy shifts and interest rate cuts, all eyes will be on the RBI’s 2025 monetary policy decisions to see how these recommendations play out in shaping India’s financial stability.
(With inputs from agencies)
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