IBLA 2024: CRR cut will ease liquidity and bring down rates in short term, says Federal Bank CEO

The Reserve Bank of India’s (RBI) decision to cut the Cash Reserve Ratio (CRR) by 50 basis points to 4% (first since March 2020), injecting ₹1.16 lakh crore into the banking system, has fuelled optimism among industry experts. While KVS Manian, MD and CEO of Federal Bank, noted the RBI’s challenge in balancing inflation control with growth stimulation, both he and V Vaidyanathan, MD of IDFC First Bank, highlighted the positive impact of the move. They believe the liquidity boost will ease borrowing costs, support economic recovery, and provide a cushion against current challenges, despite concerns in certain sectors.

Speaking to CNBC-TV18 on the sidelines of the India Business Leader Awards, Manian emphasised the dual challenge faced by the RBI in managing the economy—the need to control inflation while ensuring that growth is not stunted. He noted that the RBI’s task is to juggle these two factors, with inflationary pressures requiring interest rates to remain high and growth demands pushing for lower rates.

He acknowledged the positive impact of the CRR cut in easing liquidity, which is expected to bring down rates in the short term. However, he also highlighted that the RBI would likely continue to navigate this balancing act in upcoming policy reviews.

Manian mentioned that the current economic situation reflects more of a cyclical slowdown rather than a structural issue. While the last quarter showed slow growth, he remains optimistic about India’s medium-term economic prospects, expecting improvements as liquidity conditions ease.

Vaidyanathan also shared a positive outlook on the CRR cut’s potential to release liquidity into the system, which would facilitate lending and stimulate economic activity.

With ₹1.2 lakh crore now available for circulation, Vaidyanathan noted that the multiplier effect of this release could lead to more liquidity, driving down the cost of borrowing and providing a boost to overall growth.

Both Manian and Vaidyanathan conveyed optimism about India’s economic future, despite the current pressures in certain segments. Manian pointed out that while some pain in the books is inevitable due to the stresses in small-ticket, unsecured lending, the overall liquidity release and easing of interest rates should provide a cushion for recovery in the coming months.

Vaidyanathan also echoed a sense of cautious optimism, noting that while there are challenges, particularly in the microfinance sector, the overall corporate side and retail lending are performing well. His forecast for the near term includes a continued focus on easing liquidity, which he hopes will help navigate the current hurdles and enable economic recovery.

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