The 52nd MPC (Monetary Policy Committee) meeting took place on December 4 to December 6. In this meeting, several decision were announced that are effecting the institutions and the liquidity itself.
Cash reserve ratio
The percentage that banks must retain in cash from deposits is known as the cash reserve ratio, or CRR. Two 25 basis point installments of the reduction will be applied beginning on December 14 and ending on December 28.
The CRR’s main goals are to manage liquidity, make sure banks can satisfy depositor demands, and keep the financial system stable. The RBI can help control inflation or boost economic growth by influencing the amount of money available for lending through changes to the CRR.
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Slashing CRR will improve liquidity
According to the governor of the central bank, the CRR cut will add more liquidity to the banking system by releasing Rs 1.16 trillion. This action, according to Governor Das, is consistent with the central bank’s neutral policy stance and demonstrates a well-rounded strategy for managing liquidity while maintaining economic stability.
This is the first CRR cut in more than four and a half years. According to Das, the ruling demonstrates the RBI’s intention to loosen monetary policy without changing the repo rate.
Expert opinion
V P Nandakumar, MD & CEO, Manappuram Finance, ‘Though not surprisingly the MPC has decided to keep the repo rate unchanged, it has effectively signaled a pivot to policy easing by cutting the CRR to 4 per cent.
This is not only positive for the banking sector as their profits on M-T-M portfolio will improve significantly, it will also support the broader economy by ensuring adequate system liquidity which will see money market interest rates evolving in an orderly fashion. By doing so, the MPC has done a fine balancing act by supporting growth without lowering its inflation vigil.’
Kishor Lodha, CFO Ugro capital said, The latest monetary policy announcement comes against the backdrop of several global and domestic developments. The U.S. election results are likely to have a mixed impact on the global economy.
‘On the international front, the Federal Reserve’s decision to reduce interest rates is noteworthy, while domestically, the rupee’s rapid depreciation and Q2 GDP numbers falling below expectations have raised concerns. Additionally, high inflation, particularly in food prices, continues to limit the scope for immediate rate cuts, Lodha added.’
Lodha went on ‘The 50 bps reduction in the Cash Reserve Ratio (CRR) is a positive and timely move, as it will inject much-needed liquidity into the financial system and support economic recovery. However, for further monetary easing, controlling inflation remains crucial. ‘
