Liquidity boost: RBI cuts CRR by 100 bps to support banking system

The fall in interest rates on traditional savings instruments may mean more inflows towards AIFs

The Reserve Bank of India’s (RBI) reduction of 100 basis points (bps) in the Cash Reserve Ratio (CRR) to give a boost to liquidity in the banking system, is the biggest since 2020.

The CRR cut is scheduled in four tranches of 25 bps each starting from the fortnight beginning September 6, followed by October 4, November 1 and November 29, 2025.

The timing of the CRR cut is crucial because between September and November, India witnesses a festive season due to which currency leakage from the banking system increases putting a pressure on systemic liquidity.

Giving durable liquidity support of Rs 2.5 lakh crore to the banking system during festive season will improve the banks’ sentiments because it will ease liquidity pressure during the time when credit growth picks up significantly.

Further, systemic liquidity also faces higher pressure in September due to advance tax payments and goods and services tax outflows, so the first tranche of 25 bps CRR cut at the start of September will reduce that pressure. Usually, in September around Rs 2 lakh crore-3 lakh crore is expected from the banking system on account of these taxes.

“Besides providing durable liquidity, it will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market,” RBI Governor Sanjay Malhotra said during the policy announcement.

Prior to this, the central bank had, in December, also reduced the CRR by 50 bps, restoring the CRR to 4.0 per cent of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022.

The CRR cut in December provided Rs 1.16 lakh crore to the banking system, and this time it will provide Rs 2.25 lakh crore. The total liquidity freed up for the banking system with both CRR cuts is Rs 3.41 lakh crore.

When the RBI had cut the CRR by 100 bps in March 2020, it had freed up liquidity worth Rs 1.37 lakh crore.

In the last few months, the central bank has been infusing durable liquidity to the banking system through open market operations (OMO) purchases and USD/INR Buy/Sell swap auctions. Along with this, they have also been supporting liquidity through daily Variable Repo Rate (VRR) auctions.

The heavy liquidity infusion was due to the deficit of cash in the banking system from mid-December last year. Liquidity operations have helped the banking system turnaround, and currently, the banking system has Rs 3 lakh crore surplus.

Along with the CRR cut, the central bank has also delivered a higher-than-expected rate cut of 50 bps to support growth.