The Reserve Bank of India (RBI) will have to cut the Cash Reserve Ratio (CRR) to ease the prevailing liquidity pressure in the banking sector, according to a report by State Bank of India (SBI) research.
The report highlighted that with unchanged ownership in government securities (G-secs) in the financial year 2025-26 (FY26), the Open Market Operations (OMO) gap could still be around Rs 1.7 trillion. This suggests that additional liquidity measures may be required on a sustained basis.
It said “Liquidity Estimation; CRR cut is necessary to ease the pressure, RBI could look into using CRR more as a regulatory intervention tool / countercyclical liquidity buffer rather than as a liquidity tool in future”.
According to the report, RBI should explore using CRR more as a regulatory intervention tool or a countercyclical liquidity buffer, rather than relying on it as a liquidity tool in the future.
The current liquidity conditions, combined with the projected OMO gap, underline the necessity of proactive measures to maintain stability in the financial system. The report also called for a reassessment of RBI’s existing liquidity management framework. It suggested replacing the Weighted Average Call Rate (WACR) as the policy rate, arguing that it does not effectively serve its intended purpose.
What Else For RBI?
The current framework, according to the report, may need modifications to align with evolving market conditions and liquidity requirements. The Indian banking system’s liquidity has seen its worst liquidity crunch in more than a decade. The system liquidity moved from a surplus of Rs 1.35 lakh crore in November to a deficit of Rs 0.65 lakh crore in December, further to Rs 2.07 lakh crore deficit in January and Rs 1.59 lakh crore in February.
Additionally, the report pointed out an inadvertent cash leakage due to Mahakumbh, a major religious event.
The report says that during Maha kumbh a significant portion of cash withdrawals were made by retail depositors, whereas fresh deposit accretions have come from non-retail participants. As a result, a substantial part of the withdrawn currency may not return to systemic deposits, at least until the end of March.
With these factors in mind, the report highlighted the urgency for RBI to take proactive steps to address liquidity concerns. A CRR cut, it said, would provide immediate relief and help stabilize banking system liquidity, ensuring smoother financial operations in the coming months.
