SBI Report Suggests Major Shifts In RBI's Liquidity Management Framework

(MENAFN- KNN India) New Delhi, Feb 4 (KNN) A newly released State bank of India report indicates that the Reserve Bank of India (RBI) may transition toward using the cash reserve ratio (CRR) primarily as a regulatory intervention tool rather than for routine liquidity management, marking a potential significant shift in monetary policy approach.

The analysis recommends a comprehensive revision of the central bank's current liquidity management framework, which presently employs multiple instruments including open market operations, CRR, and the repo rate.

The report specifically advocates for repositioning CRR, which determines the minimum cash reserves commercial banks must maintain, as a countercyclical liquidity buffer instead of its current role in short-term liquidity adjustments.

In a notable recommendation, the report proposes discontinuing the weighted average call rate (WACR) as the primary policy rate, arguing that its effectiveness as an overnight borrowing and lending rate indicator has diminished.

Additionally, the analysis projects stable government securities ownership for fiscal year 2026, while highlighting a potential open market operations gap of approximately Rs 1.7 trillion.

Looking ahead to monetary policy developments, SBI forecasts that the RBI will implement a 25 basis point repo rate reduction during its February 2025 policy meeting, initiating what could become a broader rate cut cycle totaling at least 75 basis points.

The projected timeline suggests two consecutive rate reductions in February and April 2025, followed by a strategic pause in June before resuming cuts in October 2025.

The report concludes by emphasising the need for the central bank to consider additional liquidity measures to ensure banking system stability, while potentially undertaking a comprehensive review of its liquidity management strategy, CRR framework, and policy rate structure.

These proposed changes aim to enhance monetary policy effectiveness while supporting sustained economic growth through carefully calibrated rate adjustments throughout 2025.

(KNN Bureau)

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