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RBI likely to use CRR as regulatory intervention tool rather than liquidity management tool: SBI Report

04 Feb 2025 Evaluate

The State Bank of India (SBI) in its latest report has said that the Reserve Bank of India (RBI) may start using the Cash Reserve Ratio (CRR) more as a regulatory intervention tool rather than just a liquidity management tool in the future. It highlighted the urgent need for the central bank to revisit its existing liquidity management framework.

Currently, the RBI uses various measures to manage liquidity in the banking system, such as Open Market Operations (OMO), CRR, and the repo rate. However, it suggested that the CRR should be seen as a countercyclical liquidity buffer rather than a liquidity adjustment tool. This means the central bank could use CRR to control liquidity in the economy depending on the financial situation, rather than adjusting it frequently to manage day-to-day liquidity needs. 

It also suggested that the RBI should replace the Weighted Average Call Rate (WACR) as the main policy rate. WACR is the interest rate at which banks borrow and lend money in the overnight market. It said that WACR does not fully serve its purpose as a policy tool and should be reviewed. According to the report, the ownership of government securities (G-Secs) is expected to remain unchanged in FY26. However, there could still be an OMO gap of around Rs 1.7 trillion. This indicates that the RBI might need to introduce more liquidity measures on a sustained basis to ensure smooth functioning of the banking system.


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