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CRR cut is a smart move to boost liquidity when our consumption hits the peak during the festive season beginning September
| Photo Credit:
Avijit Sadhu
The Monetary Policy Committee (MPC) in a bold move surprised the markets with “all guns blazing” rate cuts to propel economic growth; a repo rate cut by 50 basis points to 5.50 per cent to stimulate private consumption and capex investments, and a 100 basis points (bps) cut in CRR to 3 per cent, on a staggered basis to ensure adequate and durable liquidity in the banking and financial system.
Again, strategically the MPC changed the monetary policy stance to ‘neutral’ from ‘accommodative’. Given the benign inflation trajectory of both CPI and core, the central bank seized the opportunity to stimulate the economy. The combination of fiscal stimulus through income tax cuts, and a 100-bps cumulative repo cut in the last five months (lower EMIs), will result in more funds in the hands of consumers for urban and rural consumption.
Interestingly, the fluid and fragile global outlook continues to weigh on the RBI’s calculations given the lower growth and trade projections by various multilateral agencies.
Fortunately, the Indian economy remains an oasis of growth and financial stability, ideally placed against global spillover issues. Our strong balance sheets of corporates, banks, households, government, and the external sector are a rarity amid a subdued global growth.
On the ground, inflation has been successfully contained within the RBI’s comfort zone, amid signs of a broad-based moderation. In fact, the near and medium-term outlook confirms that inflation trajectory is likely to be benign, thus enabling the central bank to cut rates and release liquidity through CRR cuts to boost the credit growth.
The food inflation outlook remains soft as the monsoon is likely to be above average while the core inflation will stay benign due to the easing international commodity prices.
As seen from the FY26 data so far, the domestic economic activity is resilient with the agriculture sector remaining strong with good harvest in both the kharif as well as rabi crops on the horizon. Industrial activity is improving, and the service sector is stable. Private consumption, the mainstay of our core demand, is stable and there are encouraging signs of a rise in discretionary spending. The current account deficit for FY25 is likely to be low given the moderation in trade deficit in Q4 of FY25 and a strong services exports and remittance receipts.
Change in stance
That gives the central bank ability to focus on growth and enablers required for growth. The other noteworthy announcement was change in stance to neutral from accommodative — thus signalling that the RBI has front-loaded rate cuts and liquidity measures. From here-on they will look at data prints, global and local growth, rate and inflation dynamics and then take a call on monetary policy measures. We may not see further rate cuts this calendar.
But the biggest surprise element among today’s announcements is the 100 bps cut in CRR to 3 per cent. It is a bold move to release more liquidity for banks to deploy in lending. This has come as a smart move to boost liquidity when our consumption hits the peak during the festive season beginning September, every year. The staggered move to release ₹2.5 lakh crore by December 2025 in additional liquidity into the system will provide durable liquidity. It also lowers the cost of funding for banks, ensuring a quicker policy transmission.
On the slow pick up in private capex, this certainly lowers real interest rates and should incentivise private capex cycle and capacity building. While interest rate is not the only factor for such a push, the demand that may see an uptick in the next 4-5 months would play an important role in enhancing the overall sentiment. The central bank has acted; it is now time to revive the animal spirits both in consumption and investments.
The writer is Deputy Managing Director, Kotak Mahindra Bank
Published on June 7, 2025
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