CRR Cut And Repo Rate Pause: How It Affects Common Investors?

The Reserve Bank of India (RBI) has signalled a cautious stance to monetary policy by keeping the repo rate at 6.5% as expected. However, the RBI has lowered the Cash Reserve Ratio (CRR) from 4.5% to 4% in order to promote liquidity in the banking sector and boost economic activity. Many common investors have expressed concern over the latest RBI MPC meeting, particularly in light of the 50 basis point CRR drop. The goal of this specific monetary policy measure is to increase financial system liquidity, which might have a ripple impact on a variety of investment products.

It is believed that this action will boost the banking industry's liquidity, which will affect borrowing expenses and FD rates. However, the 6.6% GDP growth forecast for 2024-2025 and boosted economic activity over the long term point to a climate of growing corporate and consumer confidence. Increased demand for loans, especially for personal, SME, and consumption-led credit, may result from this. All external benchmark lending rates (EBLR) linked to the repo rate will remain unchanged as long as the RBI maintains the repo rate at 6.5%. For the benefit of regular investors, the borrowers' equated monthly installments (EMIs) would not increase as a result.

Gaurav Dua, SVP and Head - Capital Market Strategy, Mirae Asset Sharekhan said, "Reserve Bank of India (RBI) has maintained status quo on interest rate but has announcement measure to provide liquidity support through two cuts of 25 bps each in CRR to free up Rs 50,000 crore in the banking system ahead of the busy season. The central bank seems to be confident on improvement in the demand trend and industrial growth on the back of increase in government capex and a better rural demand. However, given the inflationary concerns, the goal post for the next rate cut seems to have shifted to Feb 2025 now. We remain constructive on equity markets and prefer large caps over small caps and have a positive view on IT, real estate, banks, consumer, Pharma and engineering/capital goods sector."

"In order to achieve a $1 trillion real estate economy, radical reforms on the fiscal and monetary fronts must be initiated, including making home loans both accessible and affordable in order to tap into the huge housing demand and thereby unleash the full potential of the Indian economy. The cut in CRR by the RBI today will shore up the liquidity in the economy and help developers borrow more as there is an unlimited requirement for funds in this sector. However, a cut in repo rate would have given a fillip to consumption and helped boost housing demand," said Samir Jasuja, Founder & CEO, PropEquity.

The decision to lower the CRR is a positive step that helps borrowers, even while the repo rate-the rate at which the RBI lends to commercial banks-remains constant. To preserve liquidity and stability in the banking system, a bank's CRR is the proportion of its total deposits that must be kept in cash reserves with the RBI. While a lower CRR enhances lending capacity and improves liquidity, a higher CRR implies banks have less money available to lend, which reduces liquidity. The RBI has made more money available in the banking sector by lowering the CRR from 4.5% to 4%, which has allowed banks to provide more loans. Since lower lending rates are anticipated as a result of this action, borrowers will find home and personal loans more affordable; thus, lower borrowing costs can result in lower Equated Monthly Installments (EMIs).

Concerning the fixed income investors Vishal Goenka, Co-Founder of IndiaBonds.com said, "RBI policy remained steady with notable changes in inflation forecast being higher than before and growth expectations marked lower. A very balanced policy once again and commendable in light of global and domestic economic complexities. Fixed income investing prefers a stable, almost 'boring' environment and that is exactly what has been delivered. Investors to continue using fixed income for effective portfolio construction. A barbell strategy with buying short end corporate bonds with long end g-Sec and bank infra bonds is suggested for benefiting from carry as well as potential capital gains".

Investors in fixed deposits, on the other hand, will witness subtle changes in the rates of interest on these instruments at some point during 2025 as it is apprehended that banks will adjust their deposit rates because the level of liquidity in the system will be high.

"The fact that the RBI did not raise the PR for the time being indicates that the RBI has a very balanced strategy for managing the economy-one that seeks generic growth but does not lose sight of inflation. Such developments merit attention and investors should seek to understand the way things are likely to pan out in the event of gradual policy adjustments as this will influence investment direction, cost of borrowing, and expected gains from different financial instruments within the next financial year," said Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.

"The year 2024 seems appealing for the investors as the 50-basis points reduction in the Cash Reserves Ratio (CRR) at the recently held MPC meeting of the Reserve Bank of India has a profound impact. This move is seen as a way to increase the liquidity in the banking space which has implications on the cost of borrowing and on the rate of FDs. Analysts argue that this could see a slow trend of reduction in the interest rates, applicable for borrowers and investors alike, throughout the year of 2025," commented Gaurav Singh Parmar, Associate Director, Fincorpit Consulting.

The RBI's repo rate pause is seen as a carefully measured stance allowing the economy to stabilize in growth all the while managing inflation pressures. Fixed deposit equity investors need to brace themselves for changes to their return on investments as banks are likely to change their interest rate to reflect the liquidity and the stance of the monetary policy.