RBI may use CRR as a regulatory intervention tool rather than liquidity management tool: SBI Report

The report highlighted the urgent need for the central bank to revisit its existing liquidity management framework.

It said "The RBI could look into using CRR more as a regulatory intervention tool / countercyclical liquidity buffer rather than as a liquidity tool in future. There is an urgent need to revisit the existing liquidity management framework by RBI"

Currently, the RBI uses various measures to manage liquidity in the banking system, such as Open Market Operations (OMO), CRR, and the repo rate.

However, the report suggests that the CRR should be seen as a countercyclical liquidity buffer rather than a liquidity adjustment tool. This means the central bank could use CRR to control liquidity in the economy depending on the financial situation, rather than adjusting it frequently to manage day-to-day liquidity needs.

The report also suggested that the RBI should replace the Weighted Average Call Rate (WACR) as the main policy rate. WACR is the interest rate at which banks borrow and lend money in the overnight market.

However, SBI believes that WACR does not fully serve its purpose as a policy tool and should be reviewed.

According to the report, the ownership of government securities (G-Secs) is expected to remain unchanged in FY26. However, there could still be an OMO gap of around Rs 1.7 trillion.

This indicates that the RBI might need to introduce more liquidity measures on a sustained basis to ensure smooth functioning of the banking system.

The report also predicts that the RBI may cut the repo rate by 25 basis points in its February 2025 policy meeting. Over the entire rate cut cycle, the reduction could be at least 75 basis points.

It stated that in the first phase the RBI is expected to cut the repo rate twice in succession in February and April 2025. Then there could be a break in June 2025 and the second round of rate cuts may begin in October 2025.

The SBI report suggests that the RBI could revamp its liquidity management approach, shift CRR's role to a regulatory tool, and make changes to its policy rate framework. Additionally, it expects the central bank to cut rates gradually in 2025 to support economic growth. (ANI)