What is CRR? Analysts expect CRR to be lowered in RBIs December policy outcome due Friday

According to Zee Business polll, 60 per cent of the analysts expect a cut in cash reserve ratio  (CRR) and this is as the long-term variable rate repo auction or VRRs are turning ineffective. VRRs are conducted primarily through the infusion of funds which ensures that overseas outflows from local debt and equity do not drive up banks' cost of funds.\

Nevertheless this time as per Emkay Global Financial Services- non-conventional policy tools like liquidity easing could act as a good balancing act, with a CRR reversal to pre-Covid 4 per cent level, implying an infusion of Rs1.2trn at a time when core liquidity may steadily move to a deficit ahead with unsterilized FX intervention and CIC leakages.

We watch for easing regulatory-lending norms ahead to revitalize the waning credit offtake, added the brokerage report.

Additionally the brokerage also pointed that with long-term VRRs turning ineffective, a blunt 50bps CRR cut is a high possibility (leading to ~Rs1.2trn liquidity infusion). We note that CRR is still higher than pre-Covid level and does not even require an MPC vote. We also do not rule out some easing in regulatory lending norms ahead to stimulate the waning credit offtake.

Currently, the CRR stands at 4.5 per cent.

What is CRR?

Cash reserve ratio or CRR is the tool incorporated by the Reserve Bank of India under the monetary policy. The CRR is the cash reserve or the amount (percentage of their deposits) that lenders in the country are required to mandatorily keep with the RBI. This is in a bid to secure solvency of the bank while at the same time draining out any surplus with them.

The tool helps in checking money supply, inflation as well as for liquidity management in the country.

Through the dynamics in this mechanism, the RBI gets the authority to coordinate as well as control the credit maintained -aiding in smooth supply of credit in the economy,