Weak growth numbers make strong case for RBI to cut CRR in Dec MPC meet

Reserve Bank of India

The Reserve Bank of India (RBI) may weigh a cut in cash reserve ratio (CRR) at the monetary policy review after economic growth slowed down in the second quarter of this fiscal, according to economists.

They said that this will infuse liquidity in the banking system and lead to credit growth and investment that will help spur growth.

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. The CRR for banks now stands at 4.5 percent.

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 last time when the RBI turned to a CRR cut was in March 2020 when the pandemic broke out in India. The RBI had cut down the ratio by 100 basis points (bps) to 3 percent from 4 percent, and raised it first to 3.5 percent and then to 4 percent in 2021, before revising it further up to 4.5 percent in early 2022. The ratio remained stable at 4.5 percent since then.

“A cut in CRR will infuse liquidity in the system potentially offsetting some drag from the RBI's forex intervention. This should be positive for credit growth and investment and should fuel growth without being necessarily inflationary,” said Aditi Gupta, economist at Bank of Baroda.

Talks of a cut in policy rates and lowering of cash reserve ratio began doing the round since the GDP growth rate slowed down to 5.4 percent in the September quarter, hitting a seven-quarter low. This has shrunken the room for the central bank to keep the policy rate unchanged, while threw open options like CRR cuts to drive growth, without impacting inflation. The economy grew at 6.7 percent in the previous quarter and 8.1 percent a year ago.

Kanika Pasricha, chief economic advisor to the Union Bank of India, said the RBI guiding towards some liquidity measures on December 6 to compensate for the adverse impact of foreign exchange outflow (estimated at more than $25 billion) in the last two months with risk of sustained slip of core liquidity into deficit by Q4 unless the forex outflows reverse. “We would closely watch out for reference towards other tools in the RBI’s kitty like forex swaps and OMOs to support liquidity,” she added.

A Moneycontrol poll of 17 economists, bankers and fund managers on the December 4-6 Monetary Policy Committee meet, however, predicted that the RBI would keep the policy rate unchanged for the eleventh time as inflation increased to 6.21 percent in October. The bi-monthly MPC meeting begins Wednesday and the key decision on interest rate will be made known on Friday.

Most experts said the central bank may not change the stance in the December policy and retain it at 'neutral'. One respondent, however, expected the bank to shift to 'accommodative' from 'neutral'.