RBI Slashes Cash Reserve Ratio to 4%, Frees Up Rs 1.16 trillion

The Reserve Bank of India (RBI) has decided to cut the cash reserve ratio (CRR) by 50 basis points to 4%, as announced by Governor Shaktikanta Das in his monetary policy address. The CRR is the proportion of deposits that banks are required to set aside as cash.

This reduction will be implemented in two tranches of 25 basis points each, taking effect on December 14 and December 28. The move is expected to free up 1.16 trillion rupees in the banking system.

Despite the RBI maintaining the status quo on key interest rates, Indian equity benchmarks returned to positive territory. The benchmark 30-share BSE Sensex pack and the broader NSE Nifty climbed up to 0.10 per cent in late-morning deals.

This upswing occurred even as the RBI kept key interest rates unchanged due to high inflation. The central bank has maintained the key policy repo rate at 6.5 per cent for the 11th consecutive time since February 2023.

Deven Choksey, Managing Director of DRChoksey FinServ, commented on the CRR cut, stating, “This will be positive for most banks and their MTM profits on treasury bonds portfolio. This is the beginning of the fall in the interest rates cycle.”

Impact on GDP and Inflation

Meanwhile, India’s GDP growth slowed to 5.4% in the July-September quarter, marking its weakest pace in seven quarters. Retail inflation climbed to 6.21% in October, surpassing the central bank’s tolerance band for the first time in over a year.

The central bank had projected a 7.2% GDP growth for FY25, but this is likely to be revised following the latest September 2024 quarter numbers that showed India’s GDP growth slowing to a seven-quarter low of 5.4%.

To further boost capital inflows, the RBI has raised interest rate ceilings on FCNR-B deposits and increased FCNR deposit rates, aiming to make India a more attractive destination for foreign investments.

The RBI has also announced an increase in the collateral limit for agricultural loans, raising it from Rs 1.6 lakh crore to Rs 2 lakh crore per borrower. This move is designed to offer enhanced financial support and stability to farmers, while also enabling greater credit availability in the agricultural sector.

RBI’s Monetary Policy Stance

In the face of inflation and growth concerns, the central bank has kept the repo rate unchanged at 6.5%. The RBI’s current monetary policy stance is ‘withdrawal of accommodation’, signalling that monetary policy will likely remain tight.

Das also mentioned that the current account deficit is expected to be modest and comfortably financed nine foreign exchange reserves at $ 640 billion provide a strong buffer against global spillovers.

(With inputs from agencies)