Liquidity boost: RBI Has Cut Crr By 100 Bps To Support Credit Transmission

After the MPC of RBI discussion on 4th, 5th & 6th, decided to reduce the repo rate by 50 basis points thereby reducing the rep rate from 6.25 to 5.75%. There were unanimous expectations that RBI would continue to reduce the repo rate as already 50 basis points rep rate reduced from February 2025 after a 200 basis points increase earlier to 6.25%, and only a few expected that RBI may go for a 50 basis points cut as that would give a powerful message for boosting the GDP growth with lower cost of funds. For a few it may seem that RBI has been aggressive in reducing the repo rate by 50 basis points, however, it is quite justified by the current level of CPI inflation which has softened significantly over the last six months and currently, it is well within the tolerance band and RBI target of 4%. It is also to be noted that the food inflation which was the primary reason behind CPI inflation being at a high level, has been softened considerably. To be precise, as vegetable prices continue to record a strong seasonal correction, food inflation dropped to a 42-month low of 2.1% in April 2025 from 3.8% in February 2025. Overall CPI headline inflation declined by a cumulative 45 basis points during March and April 2025 from 3.6% in February 2025 to a low of 3.2% in April 2025-the lowest reading since July 2019. However, CPI inflation excluding food and fuel inflation also edged up to 4.2% a year on year in April 2025 after remaining steady at 4.1% in March 2025. This is primarily due to a surge in gold prices which contributed 21.4% to the core inflation in April 2025.

The inflation outlook looks favourable for the current year in the background of good monsoon expectations, record food grains production, and sufficient procurement and stock of wheat as on June 1, 2025, at 298.8lakh tonnes which is 13.3% higher over the last year, the combined tariff and rabi food grains production at 350.0 million tonnes in 2024-25 which is 6.5% higher than a year ago, moreover Food Corporation of India is possessing wheat stocks which is 5.1 times the buffer norms( highest in 4 years and rice at 4.4 times the buffer norms.

According to RBI, going forward, the likely above-normal monsoon along with its early onset augurs well for khariff crop prospects. These aspects are giving a comfortable position futristically as far as headline inflation is concerned and RBI expects the same may be likely to be well within the target of 4% and RBI further believes that it is likely to undershoot the target at the margin. Accordingly, RBI's outlook on inflation has been revised downwards from the earlier forecast of 4% to 3.7%. The risk for this outlook is from the global uncertainties including the trade policy uncertainty which may have an impact on supply chain disruptions and consequently commodities prices as well as any weather-related uncertainties. CPI inflation for the financial year 2025-26 is now projected by RBI at 3.7% with Q1 at 2.9%, Q2 at 3.4%, and Q3 at. 3.9% and Q4 at 4%

With the further boost to liquidity which is currently comfortable as RBI has injected an amount of Rs9.5 lakhs since January which has resulted in a daily surplus of Rs2 lakhs in April & May 2025, RBI has decided to reduce the cash reserve ratio by 100 basis points from 4% to 3% of NDTL in phases of 25 basis points each beginning Sept 6, October 4, November 1, and November 29.2025. as RBI is committed to providing sufficient liquidity to the banking system. This is also a positive for the banking system as reducing CRR by 100 basis points is a substantial reduction and providing liquidity of about 2.5 lakhs crore to the banking system by December 2025. This type of liquidity support will enable to reduce of the cost of funds and will facilitate banks to transmit the reduction in interest rates to credit markets.

The banks have contracted earlier deposits at a higher rate when deposit growth was moderate which has increased the cost of funds which in the current declining interest rates looks costlier for the banks as most of such deposits were also taken for longer periods which will not be able to reprice until the maturity whereas the rate transmission will have to be immediate. Hence there was a fear that banks' margins were under pressure. Moreover, in spite of the marginal reduction in deposit rates by the banks in light of less deposit growth, in order to ensure sufficient resource growth, higher deposit rates were offered for bulk deposits. In the light of a 50 basis point reduction in the repo rate as well as providing a 100 basis reduction in CRR can allow banks to effect a greater reduction in deposit rates and that will also enable them to pass the benefits of repo rate reduction to borrowers which will further facilitate good credit growth as it was visible in recent days in the absence of attractive lending rates, Corporates were resorting to bond market. According to RBI, the weighted average lending rates on fresh rupee loans and outstanding rupee loans declined by 6 bps and 17 bps respectively during Feb-April 2025 whereas the average term deposits rates on fresh deposits declined by 27 bps while WADTDR on outstanding deposits declined by 1 bps during Feb-April 2025.

It is also worth noting that RBI not only gave these two favourable decisions, namely a 50 bps cut in the repo rate as well 100 bases cut in CRR, with the further limited space left with RBI to support growth, but decided to change the stance from accommodative to neutral. RBI Governor states " from here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy to strike the right growth inflation balance" It is to be understood that with the available limited space, RBI took the bold opportunity to make a big cut of 50 basis points in repo rate, thereby front-loading the cut instead of 25 basis points cut as done in earlier two policies as the same may get better benefits both to the government, private corporates and individuals by reducing the cost of borrowing. It may also facilitate the government to reduce the average cost of borrowing which will facilitate their fiscal path. Private sector investment will be facilitated with new investments with new borrowings both from banks and markets being at reduced rates. With low inflation and lesser borrowing costs for individuals, their propensity to spend may go up and private consumption which is very much needed at a higher level, will further get a boost. With higher prospects of agriculture which has shown good growth in the last quarter of Q4 last year, rural income will get higher, and rural demand being already strong, will further increase in both discretionary and non discretionary spending.

Taking into the buoyancy on the demand side as well as improving business outlook and current strong macroeconomic fundamentals which RBI governor states that strong balance sheets of 5 major sectors- corporates, banks, households, government, and external sector and all three fronts are stable- price, financial and political as well India provides immense opportunities for investors through 3Ds- demography, digitalization and domestic demand and he feels that this 5×3×3 matrix fundamentals provides the necessary core strength to cushion the Indian economy against global spillovers and propel it to grow at a faster pace.

The current indicators are showing encouraging trends except for trade uncertainties due to the Trump tariffs policy which India is confident of arriving at a mutually acceptable trade agreement and with the successful trade agreement with the UK confident of a similar agreement with the European Union. RBI has projected GDP growth of 6.5% for 2025-26 which is the equivalent to a recent estimate of 6.5% growth of India estimated for 2024-25. If we can achieve the projected growth of 6.5% for the current year too, that will facilitate continued better GDP growth of India compared to World GDP growth has been projected at lower at 2.9% for 2025 by OECD and 2.8% for 2025 and 3% for 2026 by the IMF. RBI the above action will facilitate growth and along with price stability, the complementary monetary and credit policies and regulations, as per RBI Governor will support growth and prosperity. With the proactive and positive policy support both from the government and RBI, inspite of global geo political and trade tensions, India should not miss this opportunity to continue its strength of stable and higher growth which will facilitate to reach the aspirations of all.

(The author is former Chairman & Managing Director of Indian Overseas Bank)