The Reserve Bank of India has signalled that it is most likely to soon return the impounded funds due to the temporary hike in the cash reserve ratio.
In its August monthly bulletin, the central bank said “the intent is to return the impounded funds ahead of advance tax outflows from the banking system and well before the pick-up in the demand for bank credit that typically characterises the second half of the year.”
The due date for payment of the second instalment of advance tax for corporates and individuals is September 15th.
The Reserve Bank of India in its latest monetary policy review had asked banks to maintain an additional cash reserve ratio (CRR), a move which came as a surprise to many economists. Banks were told to hold an incremental CRR of 10% on an increase in deposits between May 19 and July 28 in RBI’s August 11th monetary policy decision. The central bank as widely expected kept its key policy rate unchanged. The I-CRR is in addition to the existing cash reserve ratio (CRR) of 4.5%.
The incremental CRR will withdraw over one trillion rupees ($12.08 billion) from the banking system, RBI governor Shaktikanta Das said.
The RBI will review this measure before September 8, ahead of the Indian festive season, when currency in circulation typically increases and banking liquidity declines.
The I-CRR move is intended to absorb liquidity added to the banking system due to a return of 2000-rupee denomination notes and even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy, the governor said.
The RBI in its monthly bulletin also said the risk of stagflation, a period of weak growth and high inflation, remains low in India despite a sharp uptick in prices. India’s annual retail inflation rose sharply to a 15-month high of 7.44% in July from 4.87% the previous month, fuelled by a sharp jump in vegetable and cereal prices. The figures breached the upper end of the RBI’s inflation band of 2%-6% for the first time in five months.
High-frequency food price data for August so far shows prices of cereals and pulses continued to increase this month, according to the bulletin.
