RBI MPC meet: What is CRR and how a cut can help boost the economy?

Many experts believe the RBI will maintain the repo rate at 6.5% but will likely introduce some liquidity measures such as a CRR cut to support the economy.

The Reserve Bank of India's monetary policy committee (MPC) is meeting for its bi-monthly review and will share the outcome on December 6. The wider view is that the RBI will keep the repo rate, the rate at which it lends money to commercial banks, unchanged at 6.5 percent for the eleventh time. A growing number of analysts, however, expect the central bank to cut the cash reserve ratio (CRR), especially after September quarter GDP dropped to a seven-quarter low of 5.4 percent.

What is the cash reserve ratio?

The CRR, which is at 4.5 percent at present, is the percentage of a bank's total deposits that it must keep as a reserve with the RBI. It helps the central bank control inflation, and liquidity in the system and also checks excessive lending.

During high inflation, the RBI raises the CRR to reduce the money available for lending, which helps cool prices.

In times of low economic growth, like now, the RBI can lower the CRR, freeing up money for banks to lend, boosting investment and helping the economy grow.

Why is a CRR cut being discussed?

The lower-than-expected Q2 GDP growth and tight liquidity in the banking system have led experts to believe that the RBI may reduce the CRR to inject more money into the economy without changing the repo rate.

A reduction in CRR would mean that banks would have more money to lend to businesses and individuals. This could help stimulate growth.

What can a CRR cut do?

If the RBI cuts the CRR by 50 basis points (bps), it will free up Rs 1.1 lakh crore to Rs 1.2 lakh crore for lending. A smaller cut of 25 bps would release about Rs 55,000 crore to Rs 60,000 crore. Banks will have more money to lend, which in turn can boost the economy.

A CRR cut can support growth without triggering inflation. It can also help offset some of the challenges caused by the RBI's efforts to stabilise the rupee, as it has been intervening in the foreign exchange market to manage the depreciation of the rupee against the US dollar, experts say.

Economists suggest the central bank may also explore other options such as foreign exchange swaps and open market operations (OMOs) to further support liquidity.

What is expected from MPC?

Several experts expect the RBI to hold the repo rate at 6.5 percent but introduce some liquidity measures such as a CRR cut to support the economy.

The majority view is that the RBI will stick to its “neutral” stance, though some expect a shift to a more “accommodative” approach to stimulate growth.