RBI to Revamp Liquidity Management: CRR's New Role Explored

The Reserve Bank of India (RBI) might transition the Cash Reserve Ratio (CRR) into a regulatory tool, based on a State Bank of India report. This change could lead to enhancements in liquidity management and policy rate reforms. Additionally, gradual repo rate cuts are anticipated in 2025 to stimulate economic growth.

The Reserve Bank of India (RBI) is contemplating a shift in the use of the Cash Reserve Ratio (CRR), transitioning it from a tool for managing liquidity to a regulatory intervention mechanism, according to a recent report released by the State Bank of India (SBI). The report emphasizes the necessity for the RBI to revisit its current liquidity management framework to enhance economic stability.

The report advises the RBI to consider employing the CRR as a countercyclical liquidity buffer, rather than merely adjusting it for daily liquidity needs. Such a strategic shift would allow the central bank to exert more precise control over economic liquidity contingent upon varying financial conditions. Furthermore, the report suggests reconsidering the effectiveness of the Weighted Average Call Rate (WACR) as the principal policy rate, advocating for a comprehensive evaluation of the policy rate framework.

Additionally, with government securities ownership projected to remain stable until FY26, the report anticipates an Open Market Operations gap of about Rs 1.7 trillion. This could necessitate more consistent liquidity measures to ensure the banking system's seamless operation. It also projects a 25 basis point cut in the repo rate at the RBI's February 2025 meeting, with further rate reductions expected throughout 2025 to bolster economic growth.

(With inputs from agencies.)