Context:

The Monetary Policy Committee (MPC) recently cut CRR while keeping the Repo rate unchanged to balance inflation and growth in the economy.

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• The Monetary Policy Committee (MPC) has decided to cut the cash reserve ratio (CRR) by 50 basis points (bps) to 4% from 4.5% while leaving the repo rate unchanged at 6.5%.
• This comes at a time when India's retail inflation surged to 6.2% in October 2024, breaching the RBI's tolerance limit.
• Gross domestic product (GDP) growth has also slowed down to 5.4% in July-September 2024. 

Cash Reserve Ratio (CRR)

• It is the percentage of a bank’s total deposits that is required to be maintained in liquid cash with the RBI as a reserve.
• It is a tool used by the RBI to manage inflation and regulate liquidity in the banking system.
• Banks do not earn any interest on these deposits

Significance of the CRR Cut

• It will unlock Rs 1.16 lakh crore bank funds, which can be used for lending and stimulating economic growth.
• It will lower borrowing costs and bring relief to homebuyers, small businesses, and corporations.

Repo Rate

• The rate at which RBI lends money to commercial banks in the event of any shortfall of funds.
• During inflation, RBI increases the repo rate to disincentivise banks from borrowing from the RBI. This reduces the money supply in the economy and helps stabilize inflation. 
• The MPC has decided to keep the repo rate steady at 6.5% for the 11th consecutive time.

Why RBI kept the Repo Rate Unchanged

• It promotes steady interest rates, which allows durable price stability. This drives steady demand, ensures consistent repayment terms, and increases buyer confidence. 
• All external benchmark lending rates (EBLR) linked to the Repo rate will not increase, giving relief to borrowers as their equated monthly instalments (EMIs) will not increase.
•  A stable rate will also benefit the real estate sector which is currently valued at $493 billion and has the potential to become a key driver of economic growth.