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The RBI will initially cut the requirement for CRR by 25 basis points from December 14, 2024, and further by 25 bps from December 28, 2024, thus getting it hiked to 4 % of NDTL. This will unfreeze about ₹1.16 lakh crore in the banking system, giving back the shift in the decided tightening steps beginning in April.
The cut in CRR comes in a backdrop of shaky global economic conditions, coupled with a downward revision of the GDP growth projection of FY25 to 6.6% from 7.2%. At the same time, inflation expectations have gone higher to 4.8 % from 4.5% because of persistent inflationary pressures. This policy change was forced by liquidity constraints occasioned by international economic shocks and ebbing domestic demand.
Due to the decrease in the Cash Reserve Ratio (CRR), banks are now required to hold lower cash reserves, which allows them to allocate more funds for loans and investments. This targeted strategy aims to support key sectors such as agriculture and Micro, Small, and Medium Enterprises (MSMEs). This opportunity aligns with recent measures taken by the Reserve Bank of India (RBI) to address macroeconomic instabilities while also managing potential inflationary pressures.
This is done in tranches to prevent a too-hasty move that may upset financial markets in an attempt to achieve the intended credit risk reduction as expressed through the CRR cut. This additional liquidity will be used by banks for extending credit thereby improving credit options. At the same time, there is no change in the repo rate; it is set at 6.5% in order to support a neutral monetary policy. This combination puts it in black and white that the RBI seeks to address both liquidity and inflation issues.
The fresh liquidity injection is expected to revive economic operations, especially in consumption-driven activities. The credit limit for collateral-free loans has been raised to ₹2 lakh, and improved credit access is expected to help revive micro, small and medium enterprises, and farmers and boost investment.
Also, the current governor of the RBI implemented new benchmarks, such as the Secured Overnight Rupee Rate (SORR) and fraud detection system MuleHunter.AI. Such steps coupled with ‘Connect 2 Regulate’ and integration with ‘FX-Retail-Bharat Connect’ show a vision of tomorrow.
The December MPC outcome also shows that the RBI is capable of making clear and nuanced trade-offs and keeping liquidity favorably tilted without jeopardizing macroeconomic stability – prudent given the external and domestic environment.
Apart from the quantitative measures, the RBI adopted various new concepts, the SORR for the overnight Rupee and for dealing with the fraud MuleHunter.AI. These steps along with 2 regulate or Connect and FX-Retail-Bharat connect also depict a future strategy.
The result in the December MPC is the RBI’s ability to manage intricate trade-offs, and maintain circulation while not threatening macrostructural stability—all as India faces both international and internal conditions.
Thank you.
Regards,
Kautilya, IBS Mumbai.
very informative content