In a crucial policy move, the Reserve Bank of India‘s (RBI) Monetary Policy Committee (MPC) has decided to cut the Cash Reserve Ratio (CRR) by 50 basis points (bps), bringing it down to 4%. This reduction, effective from December 14 and 28, 2024, marks the restoration of the CRR to its pre-policy tightening level, which had been set at 4% before the RBI initiated its tightening cycle in April 2022.
This strategic move is expected to inject approximately Rs 1.16 lakh crore of primary liquidity into the banking system, providing much-needed financial stability. The CRR is a crucial tool used by the RBI to control inflation and ensure banks hold sufficient reserves. A reduction in CRR means that banks will have more capital available to lend to businesses and individuals, potentially boosting economic activity.
Governor Shaktikanta Das, in his final address for this term, explained that the reduction in the CRR would help ease the liquidity situation in the market and further encourage economic recovery. He also pointed to the recent slowdown in GDP growth, cutting India’s FY25 GDP forecast to 6.6% from the earlier estimate of 7.2%. The inflation target for 2024-25 has been revised to 4.8%.
The announcement of the CRR cut had an immediate positive impact on the stock market, with financial and banking stocks seeing a surge. The Nifty Bank index rose 0.13%, with top banks like Canara Bank, Union Bank, and Bank of Baroda recording significant gains.
In addition, the RBI kept the repo rate unchanged at 6.5% for the 11th consecutive meeting. The MPC’s decision to maintain a neutral stance reflects the RBI’s dual mandate to control inflation while supporting growth.
Governor Das also highlighted the ongoing challenges in private consumption and investment, which contributed to the slower-than-expected GDP growth of 5.4% in Q2 FY25. However, with government spending recovering, the outlook for the coming quarters remains cautiously optimistic.
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