Context:
The Monetary Policy Committee (MPC) recently cut CRR while keeping the Repo rate unchanged to balance inflation and growth in the economy.
More on the News
- The Monetary Policy Committee (MPC) has decided to cut the cash reserve ratio (CRR) by 50 basis points (bps) to 4% from 4.5% while leaving the repo rate unchanged at 6.5%.
- This comes at a time when India’s retail inflation surged to 6.2% in October 2024, breaching the RBI’s tolerance limit.
- Gross domestic product (GDP) growth has also slowed down to 5.4% in July-September 2024.
Cash Reserve Ratio (CRR)
- It is the percentage of a bank’s total deposits that is required to be maintained in liquid cash with the RBI as a reserve.
- It is a tool used by the RBI to manage inflation and regulate liquidity in the banking system.
- Banks do not earn any interest on these deposits
Significance of the CRR Cut
- It will unlock Rs 1.16 lakh crore bank funds, which can be used for lending and stimulating economic growth.
- It will lower borrowing costs and bring relief to homebuyers, small businesses, and corporations.
Repo Rate
- The rate at which RBI lends money to commercial banks in the event of any shortfall of funds.
- During inflation, RBI increases the repo rate to disincentivise banks from borrowing from the RBI. This reduces the money supply in the economy and helps stabilize inflation.
- The MPC has decided to keep the repo rate steady at 6.5% for the 11th consecutive time.
Why RBI kept the Repo Rate Unchanged
- It promotes steady interest rates, which allows durable price stability. This drives steady demand, ensures consistent repayment terms, and increases buyer confidence.
- All external benchmark lending rates (EBLR) linked to the Repo rate will not increase, giving relief to borrowers as their equated monthly instalments (EMIs) will not increase.
- A stable rate will also benefit the real estate sector which is currently valued at $493 billion and has the potential to become a key driver of economic growth.