Liquidity vs. Policy Rates
- Businesses prioritize easy access to funds over borrowing costs, making liquidity actions more impactful than rate cuts.
- Banks are pressing RBI to reduce the cash reserve ratio (CRR) to unlock ₹1.3 lakh crore currently held without interest.
RBI’s Response to Liquidity Tightness
- Previous CRR Cut: RBI already reduced CRR by 50 basis points in December, easing liquidity strains.
- Alternative Measures: RBI has conducted bond purchases and FX swaps to inject liquidity.
- T2 Risk Factor: Trump-tariffs (T2) could fuel inflation, making a hasty CRR cut risky.
Why a CRR Cut May Not Be the Right Move Now
- CRR is a long-term policy tool, unlike OMOs or FX swaps, which can be adjusted based on market conditions.
- Banks have access to ample funds through RBI’s liquidity window.
- Upcoming RBI Dividend: A generous payout to the government will improve liquidity when reinjected into the system.
Instead of rushing to cut CRR, RBI can wait and assess the impact of its existing measures while keeping its policy options open for future uncertainties.
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