Context:
The Reserve Bank of India (RBI) is planning to use the Cash Reserve Ratio (CRR) more proactively as a regular liquidity management tool rather than reserving it for emergency interventions. The move follows a surprise 100-bps reduction in CRR, announced in four equal tranches, bringing it down to 3%, which will infuse â‚ą2.5 trillion into the banking system.
Key Highlights:
- CRR cut from 4% to 3% in phased manner to release â‚ą2.5 trillion ($29.25 billion) into the banking system.
- RBI intends to use CRR more frequently to manage liquidity, not just during crises.
- This strategy would reduce reliance on open market operations (OMOs) and FX swaps that can distort bond market yields.
- Shift aims to improve policy rate transmission and align the weighted average overnight call rate closer to the repo rate (currently 5.5%).
Why It Matters?
- Deposit Base Growth: India’s banking sector has seen a significant rise in total deposits, giving RBI greater flexibility to lower CRR without risking liquidity stability.
- Efficient Liquidity Absorption: CRR is seen as a more efficient tool for managing systemic liquidity compared to repeated OMOs or FX interventions.
- Between December and May, RBI injected $100 billion via OMOs and FX swaps — the largest such infusion in a similar timeframe.
Additional Tools Considered
- Variable Rate Reverse Repo (VRRR) auctions may be used to absorb excess liquidity as required.
- CRR may also be raised if sustained foreign inflows lead to excessive liquidity.
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