A recent report by the State Bank of India (SBI) has highlighted the potential positive impact of the Reserve Bank of India’s (RBI) recent decision to reduce the Cash Reserve Ratio (CRR). The move, announced during the latest monetary policy review, is expected to provide a significant boost to credit growth and liquidity in the banking sector.
According to SBI’s projections, the CRR cut could create additional capacity for credit expansion to the tune of 1.4 to 1.5 per cent. “CRR cut will free-up lendable resources which will get headroom equivalent to 1.4-1.5 per cent of additional credit growth,” the report stated.
This development comes at a time when credit growth has decelerated in FY24-25, slipping to around 12 per cent from 15 per cent in the previous fiscal. Tighter regulatory conditions had partly contributed to this decline. However, with supportive policy moves like the CRR and repo rate reductions, the report suggests that the credit cycle could pick up again in FY25-26.
Liquidity Infusion
SBI estimates that the CRR cut will release nearly Rs 2.5 lakh crore in primary liquidity by December 2025. This significant liquidity boost is seen as a catalyst for easing financing conditions and stimulating broader economic activity.
The report emphasised that the CRR cut will not only enhance liquidity but also reduce the funding costs for banks, thus promoting more effective transmission of monetary policy.
Impact On Bank Margins
While the reduction may not directly influence deposit or lending rates, SBI notes that it could support profitability in the sector. Improved net interest margins (NIM) by 3 to 5 basis points are expected as a result of lower cost of funds.
The monetary multiplier effect is also anticipated to increase, with projections suggesting it could exceed 6 per cent by March 2026.
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CRR As A Strategic Buffer
SBI’s analysis further indicates that the CRR is increasingly being viewed as more than a liquidity management mechanism. “CRR is no longer just a liquidity management tool but is increasingly being used as a regulatory and countercyclical buffer,” the report said. This evolution in its use is seen as helping banks better manage returns and financial stability in a dynamic market landscape.
Monetary Stability
The RBI’s recent actions in the foreign exchange market, including swap operations, are expected to mature without disrupting liquidity, according to the report. Moreover, the CRR reduction could help align short-term rates, such as the Weighted Average Call Rate (WACR), with policy benchmarks like TREPS and CBLO.
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