RBI's CRR Cut Expected To Boost Credit Growth By 1.5%: SBI Report

New Delhi, Jun 19 (KNN) The Reserve Bank of India's recent reduction in the Cash Reserve Ratio is projected to generate additional credit growth of 1.4-1.5 percent, according to a new analysis by the State Bank of India. 

The monetary policy measure is anticipated to enhance liquidity within the banking system and facilitate improved credit flow throughout the economy.

The SBI report indicates that the CRR reduction will release approximately Rs 2.5 lakh crore in primary liquidity by December 2025. 

This substantial liquidity injection represents a significant step toward easing financial conditions and supporting broader economic activity across various sectors.

Credit growth experienced a notable deceleration in FY24-25, dropping to approximately 12 percent from the previous year's 15 percent. Industry analysts attributed this slowdown partially to stricter regulatory measures implemented by the RBI during the period. 

However, the combination of CRR and repo rate cuts is expected to stimulate credit growth in FY25-26.

The CRR reduction is expected to lower funding costs for banks, potentially facilitating smoother transmission of monetary policy measures to the credit market. 

While the report notes that the CRR cut may not directly translate to immediate changes in deposit or lending rates, it could enhance bank profitability by improving net interest margins by approximately 3 to 5 basis points.

The monetary policy adjustment is projected to increase the money multiplier beyond 6 percent by March 2026. The money multiplier serves as an indicator of how much the money supply expands relative to base money changes. 

SBI's analysis suggests that CRR has evolved beyond a simple liquidity management tool, increasingly functioning as a regulatory and countercyclical buffer that enables banks to optimise resource returns and protect margins amid changing financial conditions.

The report also addresses the RBI's recent foreign exchange swap operations, designed to stabilise the rupee against global market uncertainties. 

These swaps are expected to mature without creating additional liquidity stress in the banking system.

The CRR reduction is anticipated to improve alignment between overnight and term money market rates with the RBI's policy rates. 

As the Weighted Average Call Rate has been diverging from broader market benchmarks including TREPS and CBLO, this measure supports the transition toward a Secured Overnight Reference Rate-based framework for monetary policy implementation.

(KNN Bureau)