Mumbai: On Friday, the Reserve Bank of India (RBI) announced a substantial reduction in the Cash Reserve Ratio (CRR) by 1 percent, which is expected to release ₹2.5 lakh crore into the banking system, enhancing liquidity for lending to key economic sectors.

The CRR will be lowered to 3 percent in four equal installments, concluding on November 29, 2025. This adjustment means that commercial banks will be required to hold a lesser amount of liquid cash with the RBI, thereby increasing their capacity to lend.

The last time a similar significant CRR cut occurred was on March 27, 2020, when the RBI also reduced the benchmark repo rate by 75 basis points to support the economy during the COVID-19 pandemic.

RBI Governor Sanjay Malhotra stated, "The Reserve Bank is dedicated to ensuring adequate liquidity in the banking system. To enhance this, we have decided to decrease the CRR by 100 basis points to 3 percent of net demand and time liabilities (NDTL) in a staggered approach throughout the year."

This reduction will take place in four phases of 25 basis points each, starting from the fortnights of September 6, October 4, November 1, and concluding on November 29, 2025.

Malhotra further explained that this CRR cut will inject approximately ₹2.5 lakh crore into the banking system by December 2025. It aims to provide sustainable liquidity and lower banks' funding costs, facilitating better monetary policy transmission to the credit market.

An increase in credit flow is anticipated to stimulate economic growth, which has recently dropped to a four-year low of 6.5 percent in FY'25.

He emphasized, "We will continue to observe the changing liquidity and financial market conditions and take necessary actions as needed."

Previously, the RBI had reduced the CRR by 50 basis points to 4 percent during the December 2024 Monetary Policy Committee meeting, which released ₹1.16 lakh crore into the banking system, easing liquidity constraints.

In May 2022, the CRR was raised to 4.5 percent from 4 percent in an off-cycle MPC meeting, effective from May 21 of that year.

The RBI has maintained the Statutory Liquidity Ratio (SLR) at 18 percent, which mandates banks to hold this percentage of total deposits or NDTL in government securities, ensuring they have enough liquidity to meet withdrawal demands and maintain stability.

Regarding liquidity, Malhotra noted that ₹9.5 lakh crore of durable funds have been infused into the banking system since January, leading to a transition from a liquidity deficit to a surplus by the end of March.

This improvement is also reflected in the subdued response to daily Variable Repo Rate (VRR) auctions and elevated Standing Deposit Facility (SDF) balances, averaging ₹2 lakh crore daily during April and May.

The weighted average call rate (WACR), which is the operational target of monetary policy, has been trading at the lower end of the LAF corridor since the last policy announcement, indicating enhanced liquidity conditions.

Malhotra concluded by stating that while the comfortable liquidity surplus has strengthened the transmission of policy repo rate cuts to short-term rates, a noticeable impact on the credit market is still awaited, acknowledging that such changes typically occur with a delay.