CRR cut may boost bank margins, but tight liquidity challenges persist: Report | Stock Market News

As widely anticipated, the Reserve Bank of India (RBI) in its December Monetary Policy Committee (MPC) meeting announced a 50-basis-point cut in the Cash Reserve Ratio (CRR) to enhance liquidity in the banking system. The repo rate, however, was kept unchanged at 6.5% for the 11th consecutive meeting, amid persistent inflationary pressure.

The CRR for all banks will be reduced to 4% of net demand and time liabilities (NDTL) in two tranches of 25 basis points each, effective from December 14 and December 28, respectively. This move is expected to inject ₹1.16 lakh crore into the banking system over the coming months.

While the CRR cut may not immediately influence deposit and lending rates, it is anticipated to boost bank margins, according to SBI Research. However, it noted that the tight liquidity scenario persists, with the banking system’s liquidity surplus at ₹0.69 lakh crore so far in December, down significantly from ₹1.35 lakh crore in November.

SBI pointed out that the expected ₹1.16 lakh crore liquidity infusion from the CRR cut might be insufficient to ease the overall liquidity strain due to several offsetting factors, including tax outflows, an increase in currency circulation, forex market interventions, and volatility in capital flows.

The CRR cut is projected to have a modest positive impact on bank margins, with net interest margins (NIM) improving by 3–4 basis points. Additionally, the reduction is expected to enhance the money multiplier by 15–20 basis points due to its impact on M0 (base money), as per the SBI. 

Liquidity management challenges amid structural changes

According to SBI Research, the RBI’s liquidity management has faced significant challenges recently due to heightened volatility in government cash balances, a counter-cyclical measure designed to address systemic liquidity pressures.

This issue has entered a new phase with the introduction of the SNA SPARSH platform, which replaces the earlier CSS-SNA system and absorbs substantial float funds from the banking system.

SBI noted that under the SNA SPARSH platform, 27 major Centrally Sponsored Schemes (CSS) with a combined budgetary outlay of ₹3.70 lakh crore for FY 2024-25 have migrated to a more integrated financial management system.

This transition eliminates the role of commercial banks, as central ministries and state treasuries are now connected via RBI’s eKuber platform using IFMIS (Integrated Financial Management and Information System).

“The next couple of years will thus be the biggest challenge for the RBI liquidity management to take care of an estimated ₹7.5 trillion fund flow through IFMIS. Thus we strongly recommend that CRR be brought down to 3%, which was prevailing in March 2020. This could release an additional ₹2.32 trillion in the banking system,” said SBI. 

Forecasts India’s GDP growth at 6.3%, lower than RBIs projection

SBI Research has projected India’s GDP growth for FY25 at 6.3%, significantly lower than the Reserve Bank of India’s (RBI) latest forecast of 6.6%. The RBI in its latest MPC meeting has sharply downgraded its real GDP growth forecast for FY25 from 7.2% to 6.6%, with quarterly estimates of 6.8% for Q3 and 7.2% for Q4.

This is the first time in the last five years that the RBI has first revised the growth estimates upwards and then downwards to 6.6%. This is indeed an implicit recognition by RBI of missing the growth estimates by a wide margin.

“We expect RBI to cut rates in February 2025 by a cumulative 75 basis points, and such a decision is unlikely to be impacted by what is happening to the US dollar, as was the case in 2018 when the RBI did not hike rates even as the rupee was under enormous pressure,” said SBI.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.