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The recent cut in the Cash Reserve Ratio (CRR) during the monetary policy announcement by the Reserve Bank of India is expected to create room for additional credit growth of 1.4-1.5 per cent, according to a report by the State Bank of India (SBI).
The move is likely to strengthen liquidity in the banking system and improve credit flow to the economy. It said "CRR cut will free-up lendable resources which will get headroom equivalent to 1.4-1.5% of additional credit growth" Credit growth in FY24-25 slowed to around 12 per cent compared to 15 per cent in the previous year. The slowdown was partly attributed to stricter regulatory measures taken by the Reserve Bank of India (RBI). But with CRR and repo rate cuts it is expected to rise in FY 25-26. The SBI report highlighted that the CRR cut is estimated to release around Rs 2.5 lakh crore in primary liquidity by December 2025. This liquidity infusion is seen as a positive step towards easing financial conditions and supporting economic activity. The report also noted that apart from providing durable liquidity, the CRR cut will lower the cost of funds for banks, which may help in smoother transmission of monetary policy to the credit market. However, it added that the reduction in CRR may not directly lead to a change in deposit or lending rates. But, the move could support bank profitability by improving net interest margins (NIM) by around 3 to 5 basis points. Additionally, with the reduction in CRR, the money multiplier, which shows how much the money supply increases with the base money, may rise above 6 per cent by March 2026. SBI observed that CRR is no longer just a liquidity management tool but is increasingly being used as a regulatory and countercyclical buffer. This shift helps banks optimise returns on their resources and protect their margins in a changing financial environment. The report also pointed out that the RBI's recent foreign exchange swaps, aimed at stabilising the rupee amid global uncertainties, are expected to mature without causing any liquidity stress. Lastly, the CRR cut is expected to help align overnight and term money market rates more closely with the RBI's policy rates. As the Weighted Average Call Rate (WACR) has been diverging from broader market benchmarks like TREPS and CBLO, the move also supports a quicker shift towards a Secured Overnight Reference Rate (SORR)-based framework. (ANI)
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