The Reserve Bank of India’s move to introduce incremental cash reserve ratio is for mopping up surplus liquidity in the system following the influx of Rs 2,000 notes.
“Excessive liquidity, on the other hand, can pose risks to price stability and also to financial stability. Hence, efficient liquidity management requires continuous assessment of the level of surplus liquidity,” Governor Shaktikanta Das said in the Monetary Policy review.
To tackle the situation of liquidity RBI has announced ICRR.
“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 net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023. This measure is intended to absorb the surplus liquidity generated by various factors referred to earlier including the return of Rs 2,000 notes to the banking system,” Das said.
Simply put, banks will have to deposit 10 per cent of their total funds which they raised via deposits through Rs 2,000 notes.
While RBI has clarified this is absolutely a temporary measure for managing the liquidity overhang, bankers will certainly face pressure over the next few weeks.
ICRR Impact
After RBI announced the discontinuation of Rs 2,000 notes on May 19, banks in the last 3 months have received banknotes from circulation of Rs 3.14 lakh crore up to July 31, 2023. Consequently, Rs 2,000 banknotes in circulation as at the close of business on July 31 stood at Rs 0.42 lakh crore. Thus, 88 per cent of the Rs 2,000 banknotes in circulation as on May 19, 2023, have since been returned.
“There will be a slight impact. We will have to assess the impact. The positive thing is that the RBI is going to review the result on September 8, which is just a month’s time frame,” a banker told a TV channel.
While bankers will evaluate the impact, the temporary shocks can’t be ignored as bankers are expecting an impact of up to an amount of Rs 1 lakh crore.
“The total impact will be on the amount of Rs 1 lakh crore. Impact on NIMs will be minimal since the duration is only for a month. Also, currently, underlying growth is strong, credit growth is also strong,” a private sector bank official told a TV channel.
Why the ICRR pressure
Many banks including the State Bank of India have witnessed a considerable compression on their margins in the first quarter of FY 23-24. On the other hand, there is also pressure on the deposit growth of banks. Amidst this, the pink note deposits were a breather for banks.
Anitha Rangan, Economist, Equirus, said, “In view of the surplus liquidity and perhaps to deliver an implicit hike (of lesser impact), RBI has temporarily increased the CRR levels by 10% of incremental NDTL of banks. This in effect takes out the 10% of surplus accumulated from Rs 2,000 note withdrawal and FX operations (Rs 30,000-35,000 crore). “
