The Reserve Bank of India on Friday announced that it will discontinue incremental cash reserve ratio (I-CRR) in a phased manner. I-CRR will be phased out 25 per cent each on September 9 and September 23, while the rest will be released on October 7.
“Based on an assessment of current and evolving liquidity conditions, it has been decided that the amounts impounded under the I-CRR would be released in stages so that system liquidity is not subjected to sudden shocks and money markets function in an orderly manner,” RBI’s statement read.
“It has been decided that with effect from the fortnight beginning August 12, 2023, scheduled banks shall maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their ndemand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023,” RBI Governor Shaktikanta Das had said while announcing the Monetary Policy Committee’s decisions on August 10.
Analysts expected this new measure to absorb liquidity worth around Rs 1 lakh crore from the system. With the I-CRR now removed, they expect money market rates to moderate.
RBI had said that with this movie, it intended to absorb the surplus liquidity generated by various factors, including the return of Rs 2,000 notes to the banking system. RBI said it was due to be reviewed on September 8, 2023 or earlier with a view to returning the impounded funds to the banking system ahead of the festival season.
On August 22, India’s banking system liquidity slipped into deficit for the first time this financial year, largely due to RBI’s move.
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RBI’s Deputy Governor Michael Patra in the MPC’s minutes had noted that a liquidity overhang can threaten the inflation outlook.
The banking system liquidity surplus was over Rs 1.5 lakh crore as of September 6 amid increased government spending, from over Rs 2 lakh crore before the I-CRR move.
Any deficit that emerges later in the month due to tax outflows can be bridged through short-term variable repo rate (VRR) auctions, news agency Reuters quoted Citi economists Samiran Chakraborty and Baqar M. Zaidi as saying in a note.
