A pre-policy review consultation meeting was held on March 31, 2025, in Mumbai with bank treasury officials and asset managers. In the meeting executives asked RBI officials to lower the Cash Reserve Ratio (CRR) to improve liquidity. They suggest cutting CRR by 50 basis points, i.e., to 3.5% from the current 4%.
In February 2025, RBI cut the repo rate by 25 Bps to 6.25% so that banks could reduce their interest rates on loans for the consumers, but the decision was refrained by most banks as lowering deposit rates amid tight liquidity. But since the External Benchmark Lending Rates (EBLR) are linked to repo rates, banks mandatorily had to reduce rates on home loans, credit, and small business loans but could not reduce the deposit rates, which hit bank margins.
The treasury head said that it is expected that in April RBI will lower the repo rate, so it will be beneficial if the reduction is accompanied by durable liquidity. Financial experts believe that the rate cut will be beneficial only if there is enough money available in the economy for people and businesses to borrow and spend.
RBI’s recent actions to improve liquidity:
As banks are facing liquidity concerns, the RBI has took various steps since January to ensure there is enough money flow in the banking system.
– Open Market Operations (OMO), where RBI buys government bonds from banks. On April 1 2025, RBI announced it would conduct OMO purchases of government bonds worth Rs 80,000 crore.
– Dollar-Rupee Swap Auctions, where RBI sells USD and buys INR (or vice-versa) to control currency fluctuations.
– Variable Repo Rate (VRR) Auctions, where banks borrow money from RBI for a few days or weeks to meet their short-term liquidity needs like covering sudden withdrawals or funding new loans.
Next RBI meeting will be held between April 7 and April 9, 2025 to announce its next monetary policy. In this meeting officials will discuss what possible changes can be done in the liquidity management framework.
Explanation of Few Financial Terms Used Here:
Cash Reserve Ratio (CRR)- It is the minimum amount that all banks have to keep with the RBI as a deposit. The amount is fixed and is changed from time to time by the RBI. Its purpose is to control inflation and to manage liquidity to support economic activity.
External Benchmark Lending Rates (EBLR)- It is a system through which banks decide the interest rates on loans. EBLR is directly based on external factors like repo rate. If repo rate is decreased, loan interest rate will also decrease and consumers will get loans at low rates. Similarly if repo rate increases, loan interest rate also increases and loan interest rate for consumers will increase too.
This is to ensure that borrowers get the benefit of market-driven rates without unnecessary delays.
Repo Rate (RR)- It is the interest rate at which the RBI lends money to banks.
When banks need money, they borrow from the RBI. In return, banks agree to buy government bonds at a higher price later. The extra money paid by banks is the repo rate.
When inflation increases, the RBI increases the repo rate, which reduces individuals borrowing and spending. This helps to reduce inflation.