RBI Governor Sanjay Malhotra on June 4 said the Monetary Policy Committee's (MPC) decision to cut cash reserve ratio (CRR) by 100 basis points (bps) may suffice for now, but it should not be seen as a longer term move.
Speaking at the press conference after the MPC decision, Governor Malhotra said there were two objectives behind the CRR cut. "The first objective of cutting CRR is to provide liquidity. The second objective is that the CRR cut will not only improve liquidity, but it will also reduce cost of funding for the banks," he said.
"Over the last 12-13 years, CRR has mostly remained at 4 percent. During COVID, we reduced it by 1 percent. These reserves are mainly kept for liquidity management. So, the experience, as of now, suggests that we do not need 4 percent CRR, and 3 percent CRR can suffice," the Governor added.
Sanjay Malhotra said the CRR cut shouldn’t be taken as a long-term move, as RBI can make changes in the future based on circumstances. "We do not know what the future holds. So do not hold me to this number that we will maintain 3 percent. But as of now, it seems that 3 percent is a comfortable CRR to have from the liquidity management perspective too. Apart from providing liquidity, the 3 percent CRR will reduce [banks’] costs and improve their NIMs by at least 7 bps, as per our estimates,” he said.
Malhotra added that the central bank has decided to provide more liquidity for “a better transmission, a faster transmission".
Market expert Ajay Srivastava of Dimensions Consulting told CNBC-TV18 that the Governor is 'conscious' of the economy's concerns and is responding to it. "The capital requirement goes down due to the CRR hike. To expand, a lender needs capital. This is important as banks have more liquidity to lend, and they don't need to raise capital or debt and then lend, which means banks will see a postponement of capital dilution so that is a good story to buy into," said Ajay Srivastava.
Yashoraj Tyagi, CEO of CASHe, meanwhile said, "The RBI’s 100 basis point rate cut in 2025 marks a pivotal moment for the digital lending industry. Lower funding costs and improved liquidity enable us to offer more affordable credit, particularly to underserved and new-to-credit customers . This is especially impactful for short-term, unsecured loans, where borrowers are most sensitive to interest rates. While the outlook is positive, responsible lending remains key as we scale to meet rising demand."
Also Read: Our LIVE blog on RBI MPC meeting outcome
The 100 bps CRR cut will be implemented in four tranches of 25 bps each, and the step is expected to inject Rs 2.5 lakh crore into the banking system, boosting liquidity and supporting credit flow. The reduction in the CRR cut will start from fortnights beginning September 6, October 4, November 1 and November 29, 2025, the Governor said.
Following the announcement, equity markets reversed early losses and moved into positive territory, with the Bank Nifty hitting a record high.
Manish Kothari, Group President and Head of Commercial Banking at Kotak Mahindra Bank, said, "The RBI has made a clear and decisive call to propel economic growth, deploying all key policy levers in a bold and timely manner. By front-loading a 50-basis point repo rate cut and infusing durable liquidity through a 100-basis point CRR reduction, the RBI has demonstrated its commitment to ensuring effective monetary transmission. With inflation softening, liquidity conditions comfortable, and financial stability intact across banks, NBFCs, and corporates, the macroeconomic environment is ripe for sustained growth."
Chanchal Agarwal, CIO of Equirus Credence Family Office, meanwhile said, "In a bold policy shift, the RBI delivered a surprise 50 bps repo rate cut and announced a 100 bps CRR cut in four tranches, injecting ~₹2.5 lakh crore liquidity into the system. This marks a cumulative 100 bps easing in CY2025, following earlier 25 bps cuts each in February and April. Coupled with a record ₹2.69 lakh crore dividend and ₹9.5 lakh crore in durable liquidity injections since January, the RBI is aggressively stimulating growth via both monetary and fiscal levers."
"These steps will definitely improve the liquidity condition in the banking system, reduce credit cost, and enhance credit availability. These measures will also help foster consumption, and improve household savings. The overall improvement in the liquidity condition will stimulate economic growth and enhance credit availability, especially in the rural economy and MSME sector, which are badly in need of formal credit," said Umesh Mohanan, ED & CEO, Indel Money.
Dhawal Dalal, President & CIO-Fixed Income at Edelweiss MF, said, "Today's MPC policy surprised the bond market with front loading of rate cut & liquidity with a larger-than-expected 50 bp cut and 100 bp reduction in CRR. With this, the MPC has delivered a 100 bp cut in the Repo Rate. The banking system's liquidity has also turned sufficiently positive. All these is aimed at propelling the economy to the next potential level. The policy stance has been changed to neutral. That may dampen the sentiment a bit for the time being."
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