Today in the RBI MPC Meeting, though the repo rate remain unchanged, the central bank slashed the CRR to 4% after a long time. RBI Governor, Shaktikanta Das announced the decrease in CRR and said that it can help in releasing ₹ 1.16 lakh crore of funds to the banks which in turn will increase the lending capacity of the commercial banks. So what is this CRR or why it matters to the economy, banks, and investors? What are the other highlights of the MPC meeting today? Let’s find out in the blog below –
What is CRR? How it matters?
CRR stands for Cash Reserve Ratio, which is the mandatory percentage of funds a commercial banks need to keep as reserve out of its deposits with the central bank to maintain liquidity in the whole banking system. This reserved fund is not allowed to be used by the commercial bank for any kind of lending services or investments.
Now in today’s meeting the CRR has been reduced from 4.5% to 4%, which means more funds will be available to the commercial banks for lending. This in turn can increase the liquidity in the market with more availability of funds and help in business growth. The repo rate cut is a direct action taken by RBI to curb inflation, and decreasing the repo rate helps boost the economy by making credit cheaper, which leads to economic growth. CRR is a broader strategy where more funds are injected into the market to help the businesses use them and grow, while interest rate is stabilized or inflation gets under control.
This 0.5% reduction in the CRR can lead to the release of ₹ 1.16 lakh crore for commercial banks and NBFCs, which they can use for lending purposes.
Key Highlights of RBI Monetary Policy Meeting 2024
Apart from reducing CRR, the other important factors decided by the monetary policy committee today are –
- The RBI repo rate has been kept unchanged at 6.5% for the 11th time consecutively. As there is a direct correlation between inflation and interest rates, even though the inflation surpassed the RBI’s upper tolerance level of 6%, the interest rate remain unchanged in today’s MPC meeting. While the market is looking forward to a rate cut, due to inflation again increasing, the rates couldn’t be slashed. It is not only the inflation, which rose during September, and October, but also the GDP growth has fallen during the second quarter even against its own anticipation of 7% to only 5.4%.
- The GDP growth forecast by RBI, which was 7.2% for the entire FY24, has been now slashed to 6.6%.
- The inflation target has to be increased to 4.8% from the earlier 4.5% for FY24 as it has gone too far to be curbed to 4.5% level in this fiscal.
Stock market Reaction
As the RBI announced the CRR cut, the banking indices and stocks started rejoicing with Nifty Bank trading in green during the early hours of the day, though it dropped marginally during the end. During the early hours of the session today, the market soared, however, the markets are nearing the close, it is becoming sluggish and losing the points it gained in the morning.
Source: TheIndianExpress
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