Gradual Increase in Cash Reserve Ratio to Withdraw 1 Trillion Rupees from Banking System
Banks, which were relieved by the news of no changes in the policy repo rate, were caught off guard when the Reserve Bank of India (RBI) introduced a new measure called the incremental cash reserve ratio (I-CRR). This measure, set at 10%, requires banks to set aside an additional 1 trillion rupees from the banking system.
However, it’s important to note that the I-CRR is a temporary step. The RBI plans to reassess this measure on September 8, 2023, or even earlier, to decide whether the funds should be returned to the banks, especially in light of the upcoming festival season. This new requirement is in addition to the existing Cash Reserve Ratio (CRR), which mandates that banks maintain a certain percentage of their deposits as liquid cash with the RBI. Currently, the CRR stands at 4.50%.
RBI Governor Shaktikanta Das explained that the decision to implement I-CRR was prompted by a surge in liquidity within the banking system after the announcement of the withdrawal of 2000 rupee notes. The RBI is concerned that this increase in liquidity could lead to inflation. According to the RBI, having too much liquidity can create risks for both stable prices and the overall financial system. To counter this, additional measures are necessary to absorb the excess liquidity.
As a result, the RBI has determined that starting from the fortnight beginning August 12, 2023, scheduled banks will need to maintain an I-CRR of 10% on the increase in their net demand and time liabilities (NDTL) that occurred between May 19 and July 28, 2023.
The RBI clarified that even with this temporary withholding of funds, there will still be enough liquidity available to meet the credit requirements of the economy.
During a press conference following the announcement, Governor Das disclosed that the total amount held through this measure will be slightly over 1 trillion rupees.
This marks the second instance where the RBI has used this tool to manage liquidity. Back in November 2016, the RBI had mandated that banks maintain an I-CRR of 100% on the increase in their NDTL between September 16 and November 11, 2016.