What's the Best Debt Fund Allocation Strategy After RBI's Policy Move?

Long-maturity G-Secs as well as corporate bonds are key to a long-term debt portfolio

- Amit Tripathi

The Reserve Bank of India's (RBI) decision to reduce the cash reserve ratio (CRR) in its bi-monthly monetary policy marks an important first step in its policy easing cycle. Former RBI governor Shaktikanta Das announced a 50 basis point reduction in CRR to 4% during the monetary policy meeting last week. The CRR, a key monetary policy tool, mandates banks to hold a specified percentage of their total deposits as liquid reserves with India's central bank. This move is expected to increase liquidity in the banking system, potentially supporting credit growth and economic activity.

However, while narrowly seen as a liquidity measure, injecting close to ₹1.16 trillion in primary liquidity, the CRR cut carries broader implications. Unlike open market operations (OMOs) or forex intervention-led liquidity infusions, a CRR cut directly reduces the cost of funding for the banking system and facilitates better transmission of the anticipated rate-cut cycle.

The CRR cut also provides a clear signal of RBI's intent to maintain an accommodative stance, helping ensure stable market conditions during a challenging global environment. The central bank's move further strengthens confidence in the broader policy framework, which aims to balance inflation control with supporting growth.