How does RBI’s CRR cut affect banks and which banking stocks to buy now? Here’s experts take | Stock Market News

Although the Reserve Bank of India held off on premature rate cuts due to persistent inflation, it provided significant relief to market participants by announcing a 50-basis-point reduction in the cash reserve ratio (CRR) on Friday, December 6. The move is expected to ease the liquidity situation in the system and boost the profitability and net interest margin of financial companies.

The RBI will cut the CRR in two equal tranches of 25 bps each, effective from the fortnight beginning December 14, 2024, and December 28, 2024. After two reductions, the CRR requirement will return to the pre-pandemic level of 4 per cent in the current financial year. It will release primary liquidity of about ₹1.16 lakh crore to the banking system.

Experts hailed the decision, describing it as the right move to address the current unfavourable growth-inflation dynamics when inflation is high and growth is losing steam. The CRR cut is aimed at preventing excessive liquidity draining from the economy, which typically weighs on economic growth.

What does a CRR cut mean for banks?

Banks are required to keep a certain percentage of their total deposits with the RBI to ensure the stability and liquidity of the banking system. CRR also acts as a tool for the RBI to manage money flow and inflation.

This money reserve of banks with the RBI is the cash reserve ratio (CRR). This money is not available for lending but is kept aside to ensure that banks have enough liquidity to meet customer withdrawal demands.

Simply put, a cut in CRR means banks will have more money to lend now as they will be required to keep less money as reserves with the central bank.

Banks’ increased lending accelerates economic activities as it can help stimulate demand for credit, supporting growth in several sectors such as manufacturing, infrastructure, housing and consumer goods.

With a cut in CRR, banks earn interest on the funds that would have otherwise been parked with the RBI at no interest. This enhances banks’ profitability.

“The CRR cut would take the rate back to levels before the start of the hiking cycle in April 2022. This will boost the credit supply. It could translate to a 2-6bp improvement in domestic banks’ net interest income (assuming all funds are deployed for loans),” said Radhika Rao, Executive Director and Senior Economist at DBS Bank.

“This policy shift is expected to positively impact the banking sector, particularly PSU banks. As banks can lend more following the CRR cut, credit growth—previously a constraint, may see improvement in the near future,” Abhishek Pandya, a research analyst at StoxBox, observed.

Ajit Mishra, the SVP of Research at Religare Broking, underscored the RBI’s decision to reduce the CRR by 50 basis points is set to have a notable impact on the banking sector and the broader economy.

“This measure boosts liquidity, enabling commercial banks to expand their lending capacity. With additional funds, banks may lower loan interest rates, fostering increased credit demand from consumers and businesses,” Mishra said.

“This is especially important in the current economic scenario, where stimulating investment and spending is critical for driving growth. Moreover, the enhanced liquidity could create a supportive environment for interest rate-sensitive sectors such as real estate and consumer goods. However, it remains essential to monitor how this increased liquidity affects inflationary pressures.”

Banking stocks to buy

Pandya of StoxBox said that PSU banks, SBI, Bank of Baroda, and Canara Bank stand out as attractive opportunities at current valuations.

Pandya finds SBI a compelling buy due to its robust performance, improved NPA ratios, and positive asset quality trends despite concerns around unsecured retail loans. Furthermore, SBI’s healthy loan growth of 15 per cent YoY, well above the industry average, and its diversified, granular loan book provide added resilience, reducing the likelihood of negative surprises in credit costs.

“We believe SBI is well-positioned for sustained growth. This is supported by surplus liquidity, a comfortable LDR of 75 per cent, and its ability to manage margins ahead of a potential rate-cut cycle (as seen in its 30bps MCLR increase in the first half of FY25). This positions SBI favourably for future growth,” said Pandya.

Mishra of Religare Broking finds HDFC Bank, ICICI Bank, and SBI as attractive options in the banking space.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.