Implementation of the CRR cut will happen in four phases from September to November 2025, reducing the ratio to 3%, its level prior to the pandemic.
SBI predicts that this action will unlock approximately ₹2.5 lakh crore in primary liquidity for the banking system by the end of December.
The report emphasizes that the CRR reduction will not only ensure sustained liquidity but also decrease banks’ funding costs. This is likely to aid in the transmission of monetary policy and lower lending rates, although SBI observes that the direct mathematical effect on deposit and lending rates may be marginal.
Emphasis on growth, inflation expectations revised down
The Monetary Policy Committee (MPC) approved the 50 bps cut in the repo rate to 5.5% with a majority vote, while one external member advocated for a smaller 25 bps adjustment. The MPC also shifted its policy stance from “accommodative” to “neutral.”
SBI indicates that this policy decision signifies a pivot towards growth.
An analysis of the RBI Governor’s statement reveals a heightened focus on terms related to expansion, in contrast to concerns regarding inflation.
The RBI has updated its FY26 GDP growth projection to 6.5%, attributing this to improved rural demand, capacity utilization, robust corporate balance sheets, and increased government capital expenditure. Additionally, it has decreased its FY26 CPI inflation forecast to 3.7%, down from 4.0%, driven by expectations of a favorable monsoon and softened commodity prices.
Impact on monetary transmission and banks
The report foresees a strengthening of monetary transmission, especially as more than 60% of existing bank loans are now tied to external benchmark lending rates (EBLR). A reduction in average lending rates by 30 basis points is anticipated in the near term, while fixed deposit rates have already seen declines of 30–70 bps since February 2025.
SBI’s variance decomposition analysis, utilizing a VAR model, indicates that the proportion of loan rate variance explained by changes in the repo rate will rise from 9% in the initial month to over 52% by the twelfth month, highlighting a gradual yet robust policy transmission.
According to the report, banks may further adjust deposit rates in response to a quicker repricing of loans compared to liabilities. The CRR reduction is also expected to alleviate margin pressure, potentially enhancing banks’ net interest margins by 3–5 basis points.
Limited potential for additional easing
With a cumulative cut of 100 bps in repo rates since February 2025 and enhanced liquidity from the CRR adjustment, SBI Research maintains that there is minimal scope for further monetary easing in the short term.
The firm anticipates that the RBI will keep the status quo in the forthcoming quarter, unless significant shifts occur in macroeconomic indicators.
First Published: Jun 8, 2025 2:46 PM IST
