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Business Standard
2 days ago
- Business
- Business Standard
RBI cuts CRR by 1%, to unlock ₹2.5 trillion to banking system by Dec
Reserve Bank on Friday decided to cut Cash Reserve Ratio (CRR) by a huge 1 per cent, which will unlock ₹2.5 trillion liquidity to the banking system for lending to productive sectors of the economy. With the reduction in four equal tranches ending November 29, 2025, the CRR would come down to 3 per cent. This means that the commercial banks would have to maintain a lower level of 3 per cent in liquid cash form with the RBI allowing them to have higher funds for lending. "The Reserve Bank remains committed to provide sufficient liquidity to the banking system. To further provide durable liquidity, it has been decided to reduce the cash reserve ratio (CRR) by 100 basis points (bps) to 3 per cent of net demand and time liabilities (NDTL) in a staggered manner during the course of the year," RBI Governor Sanjay Malhotra said, while announcing the bi-monthly MPC outcome. This reduction will be carried out in four equal tranches of 25 bps each with effect from the fortnights beginning September 6, October 4, November 1 and November 29, 2025, he said. "The cut in CRR would release primary liquidity of about Rs 2.5 trillion to the banking system by December 2025. Besides providing durable liquidity, it will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market," he said. Higher credit flow will help in boosting economic growth which hit a four-year low of 6.5 per cent in FY'25. "I would like to reiterate that we will continue to monitor the evolving liquidity and financial market conditions and proactively take further measures, as warranted," he said. RBI had last slashed CRR by 50 basis points to 4 per cent in the December 2024 MPC announcement. It was done in two equal tranches of 25 basis points, each with effect from the fortnight beginning December 14, 2024 and December 28, 2024. The move led to the unlocking of Rs 1.16 trillion to the banking system and easing the liquidity situation. The RBI on May 4, 2022 had raised CRR to 4.5 per cent from 4 per cent in an off-cycle Monetary Policy Committee (MPC) meeting, with effect from May 21 the same year. RBI, however, did not tinker with Statutory Liquidity Ratio (SLR) and maintained it at 18 per cent. SLR is a regulatory requirement that requires banks to hold 18 per cent of total deposits or net demand and time liabilities (NDTL) in government securities. This ensures that banks have sufficient liquidity to meet customer withdrawal demands and maintain financial stability. On the liquidity situation, Malhotra said, a total amount of Rs 9.5 trillion of durable funds has been injected into the banking system since January. As a result, after remaining in deficit since mid-December, liquidity conditions transitioned to surplus at the end of March. This is also evident from the tepid response to daily Variable Repo Rate (VRR) auctions and high Standing Deposit Facility (SDF) balances – the average daily balance during April-May amounted to Rs 2 trillion. Reflecting the improvement in liquidity conditions, the weighted average call rate (WACR) – the operating target of monetary policy – traded at the lower end of the LAF corridor since the last policy, he said. The comfortable liquidity surplus in the banking system has further reinforced transmission of policy repo rate cuts to short term rates, he said. "However, we are yet to see a perceptible transmission in the credit market segment, though we must keep in mind that it happens with some lag," he said. (Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
Mint
24-04-2025
- Business
- Mint
Analysts game out use of Fed toolkit if market needs central banks help
Fed toolkit includes Standing Repo Facility, Treasury debt buyback program Fed officials not rushing to intervene despite market volatility Experts suggest bond purchases could be last resort to stabilize markets NEW YORK, - Market participants unsettled by the Trump administration's choppy policy rollout are working to game out what the Federal Reserve would do if asset prices spiral out of control and require stabilization by the U.S. central bank. The anxiety arises from weeks of volatile trading and big price declines across a range of securities due to President Donald Trump's seesawing tariffs announcements, which are widely expected to stoke inflation while depressing growth and hiring. A more recent wave of price swings followed on the heels of Trump's attacks on the Fed for not cutting interest rates since he returned to power in January and his public musings about firing Fed Chair Jerome Powell. Recent trading has at points recalled the early moments of the COVID-19 pandemic. The Fed at that time responded by slashing short-term rates to near zero while buying trillions of dollars of Treasury bonds and mortgage-backed securities. It also launched programs to shore up specific sectors. If market conditions called for it, notable parts of that toolkit could be again brought out, bolstered by new tools and policy changes that would make this first line of defense operate largely on auto-pilot. "There's a toolkit in place if, if markets were really to stop functioning," said Patricia Zobel, former manager of the New York Fed group that implements monetary policy and now head of macroeconomic research and market strategy at Guggenheim Investments. She pointed to the Fed's Standing Repo Facility, a discount window emergency lending rate that now matches the top end of the federal funds rate, as well as a repo facility for central banks, as a suite of tools "which can support market functioning" when liquidity is an issue. Zobel also said an ongoing Treasury debt buyback program could also help manage liquidity if needed, adding that "in extremis," if cash markets were facing functioning issues, "ending balance sheet runoff would probably be the first order of business." Fed officials for now do not seem to be in any rush to step in. Powell last Wednesday was asked if the U.S. central bank would intervene if the stock market was falling sharply and replied, "I'm going to say no, with an explanation." Market tumult is tied to investors processing the big changes in policy pursued by the Trump administration, Powell said. But most importantly from the Fed's perspective, market plumbing is holding together and trading has been "orderly." And that's what's key for the Fed. Experts agree that if markets do run into trouble again, the Fed's still-massive balance sheet could be a tool, albeit one reached for with hesitancy. A market breakdown could cause the central bank to stop an already-slowed effort to reduce its holdings and could even drive it to start buying bonds again. Growing holdings again would be challenging because balance sheet expansion can be seen as a shift to stimulative monetary policy rather than just a move to stabilize markets. Some suggest the Fed could take a page from the Bank of England's playbook, which in 2022 used temporary asset purchases to settle UK bond markets upended by former Prime Minister Liz Truss' budget proposal. Buying bonds again "should be kind of a last line of defense," said Jeremy Stein, a former Fed governor who is now a professor at Harvard University. "But it's even more fraught now, because the last thing you want to be doing is signaling monetary policy is easing when you know there's such a worry over inflation." Stein joined other economists in a recently published paper that argued the Fed should set up a facility that could buy bonds and later sell them to target breakdowns that might emerge from a key type of hedge fund trade. That could distinguish any purely market-stabilization bond purchases from anything seen as a broader form of stimulus, which would be an issue with inflation still above the Fed's 2% target. That said, the simplicity of bond purchases ups the odds of usage for some. The Fed is "not going to be able to repo their way out of this if and when we get to that situation," and outright buying might be the most effective path to putting a floor underneath asset prices if that's what's called for, said Steven Kelly, associate director of research at the Yale School of Management's Program on Financial Stability. Before turning to asset buying, however, the automatic stabilizers Zobel pointed to would likely get the first workout, which means those tools' usage could also serve as indicators of market conditions. Of these options, the Standing Repo Facility, which allows Treasuries owned by eligible firms to be converted quickly into cash, looms largest. Launched in 2021, the SRF is aimed at preventing liquidity shortages. It's only gotten one notable round of usage so far, which happened last year. Troubled banks could also draw loans from the so-called Discount Window, which Fed officials have been encouraging as part of a broader bid to destigmatize this long-standing emergency lending facility. The Fed could, as it did in 2020, also use discretionary repo operations - buying Treasuries with an agreement to sell them back - for terms longer than overnight to also add liquidity to the system. This article was generated from an automated news agency feed without modifications to text. First Published: 24 Apr 2025, 03:31 PM IST
Zawya
24-04-2025
- Business
- Zawya
Analysts game out use of Fed toolkit if market needs central bank's help
Market participants unsettled by the Trump administration's choppy policy rollout are working to game out what the Federal Reserve would do if asset prices spiral out of control and require stabilization by the U.S. central bank. The anxiety arises from weeks of volatile trading and big price declines across a range of securities due to President Donald Trump's seesawing tariffs announcements, which are widely expected to stoke inflation while depressing growth and hiring. A more recent wave of price swings followed on the heels of Trump's attacks on the Fed for not cutting interest rates since he returned to power in January and his public musings about firing Fed Chair Jerome Powell. Recent trading has at points recalled the early moments of the COVID-19 pandemic. The Fed at that time responded by slashing short-term rates to near zero while buying trillions of dollars of Treasury bonds and mortgage-backed securities. It also launched programs to shore up specific sectors. If market conditions called for it, notable parts of that toolkit could be again brought out, bolstered by new tools and policy changes that would make this first line of defense operate largely on auto-pilot. "There's a toolkit in place if, if markets were really to stop functioning," said Patricia Zobel, former manager of the New York Fed group that implements monetary policy and now head of macroeconomic research and market strategy at Guggenheim Investments. She pointed to the Fed's Standing Repo Facility, a discount window emergency lending rate that now matches the top end of the federal funds rate, as well as a repo facility for central banks, as a suite of tools "which can support market functioning" when liquidity is an issue. Zobel also said an ongoing Treasury debt buyback program could also help manage liquidity if needed, adding that "in extremis," if cash markets were facing functioning issues, "ending balance sheet runoff would probably be the first order of business." SIDELINED FOR NOW Fed officials for now do not seem to be in any rush to step in. Powell last Wednesday was asked if the U.S. central bank would intervene if the stock market was falling sharply and replied, "I'm going to say no, with an explanation." Market tumult is tied to investors processing the big changes in policy pursued by the Trump administration, Powell said. But most importantly from the Fed's perspective, market plumbing is holding together and trading has been "orderly." And that's what's key for the Fed. Experts agree that if markets do run into trouble again, the Fed's still-massive balance sheet could be a tool, albeit one reached for with hesitancy. A market breakdown could cause the central bank to stop an already-slowed effort to reduce its holdings and could even drive it to start buying bonds again. Growing holdings again would be challenging because balance sheet expansion can be seen as a shift to stimulative monetary policy rather than just a move to stabilize markets. Some suggest the Fed could take a page from the Bank of England's playbook, which in 2022 used temporary asset purchases to settle UK bond markets upended by former Prime Minister Liz Truss' budget proposal. Buying bonds again "should be kind of a last line of defense," said Jeremy Stein, a former Fed governor who is now a professor at Harvard University. "But it's even more fraught now, because the last thing you want to be doing is signaling monetary policy is easing when you know there's such a worry over inflation." Stein joined other economists in a recently published paper that argued the Fed should set up a facility that could buy bonds and later sell them to target breakdowns that might emerge from a key type of hedge fund trade. That could distinguish any purely market-stabilization bond purchases from anything seen as a broader form of stimulus, which would be an issue with inflation still above the Fed's 2% target. That said, the simplicity of bond purchases ups the odds of usage for some. The Fed is "not going to be able to repo their way out of this if and when we get to that situation," and outright buying might be the most effective path to putting a floor underneath asset prices if that's what's called for, said Steven Kelly, associate director of research at the Yale School of Management's Program on Financial Stability. STABILIZERS Before turning to asset buying, however, the automatic stabilizers Zobel pointed to would likely get the first workout, which means those tools' usage could also serve as indicators of market conditions. Of these options, the Standing Repo Facility, which allows Treasuries owned by eligible firms to be converted quickly into cash, looms largest. Launched in 2021, the SRF is aimed at preventing liquidity shortages. It's only gotten one notable round of usage so far, which happened last year. Troubled banks could also draw loans from the so-called Discount Window, which Fed officials have been encouraging as part of a broader bid to destigmatize this long-standing emergency lending facility. The Fed could, as it did in 2020, also use discretionary repo operations - buying Treasuries with an agreement to sell them back - for terms longer than overnight to also add liquidity to the system. (Reporting by Michael S. Derby; Editing by Dan Burns and Paul Simao)
