RBI cuts CRR by 50 basis points, to be cut in two tranches of 25 bps each

RBI

In a surprise move, the Monetary Policy Committee of the Reserve Bank of India has decided to reduce cash reserve ratio (CRR) by 50 basis points (bps). Post Friday's move, CRR would stand at 4 per cent as against 4.5 per cent. The CRR to be cut in two tranches of 25 basis points each in two fortnights beginning December 14 and December 28.

This is the second time in four years that the central bank is tinkering with CRR. Last time, at the start of the pandemic, RBI slashed CRR by 100 bps from 4 percent to 3 percent to manage tight liquidity conditions. However, in a year, it resorted the CRR to 4 percent and by 2022 it shored it up to 4.5 percent.

CRR is a percentage of a bank's deposits that must be kept in the form of cash or reserves with the central bank. The RBI use this tool to control inflation, money supply, and maintain liquidity in the economy.

A cut in the CRR will free up liquidity for banks, which otherwise would have been locked with the RBI. Reduction in CRR would leave more money with banks to lend as this would mean that banks will have to maintain less cash reserves with the regulator.

The move follows weak GDP growth data for November. According to data released by the government GDP growth declined to 5.4 percent for Q2 FY25 hitting a 7-quarter low.