No case for CRR cuts with liquidity deficit driven by transitory factors

Anticipating the current liquidity deficit, the RBI in its December policy proactively reduced the cash reserve ratio (CRR) of all banks in two equal tranches of 25 basis points

The overall liquidity of the banking system turned into a deficit starting the second fortnight of December 2024, with the shortfall gradually rising to Rs 2.36 trillion by January 20. This was partly due to a build-up of government cash balances with the Reserve Bank of India (RBI). Net surplus durable liquidity also declined from a peak of Rs 4.20 trillion on July 26, 2024 to Rs 64,350 crore by December 27 (the latest period for which data is available), mainly because RBI intervention in the forex market drained a considerable amount of rupee liquidity from the system. Since forex