NEW DELHI: The Reserve Bank of India (RBI) might start using the cash reserve ratio (CRR) as a tool for regulatory intervention rather than for liquidity management, a report by the State Bank of India revealed.
The report stressed on the need for the apex bank to revise its current liquidity management framework.
At present, the RBI uses many measures to manage liquidity in the banking sector such as open market operations, CRR and repo rate.
What is CRR?
CRR or cash reserve ratio, refers to the minimum amount of deposit that commercial banks require to hold as cash. The CRR is also used to control the cash flow
However, the report argued that CRR should be viewed as a countercyclical liquidity buffer rather than simply an adjustment tool for short-term liquidity needs. This means that the CRR should be used to regulate liquidity based on broader economic landscape rather than frequent tweaks for daily liquidity management.
The report further proposed replacing the weighted average call rate (WACR) as the main policy rate. It said that the WACR, which reflects the interest rate at which banks borrow and lend overnight, does not fully serve its purpose as a policy tool, and should be reconsidered.
Additionally, the report notes that government securities (G-Secs) ownership is likely to remain stable in FY26, but an OMO gap of around Rs 1.7 trillion could exist.
It also hinted that the apex bank might need to adopt more liquidity measures to ensure smooth functioning of the banking system.
Looking ahead to monetary policy, SBI predicted that the RBI may cut the repo rate by 25 basis points in its February 2025 policy meeting, with a total reduction of at least 75 basis points over the entire rate cut cycle.
The first phase could see two consecutive cuts in February and April 2025, followed by a pause in June, before the second phase of reductions begins in October 2025. It also anticipates gradual rate cuts in 2025, aimed at boosting economic growth.
Overall, the report suggested that the RBI could revisit its liquidity strategy, redefine the role of CRR, and reconsider its policy rate framework.
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About The Author
I’m JP, a 26-year-old from Odisha, India 🇮🇳 and the founder of newsxbyte.com 📰. I write articles and news on a variety of topics, including business, finance 💼, and exam updates 📚. With a passion for journalism and digital content, I strive to keep my readers informed and engaged with the latest updates and insights.
