Reserve Bank of India (RBI) announced after the conclusion of its monetary policy committee meeting that banks will be required to maintain a 10 per cent incremental cash reserve ratio (ICRR) from August 12. It would be applicable on the increase in net demand and time liabilities (NDTL) of banks between May 19, 2023 and July 28, 2023. RBI Governor Shaktikanta Das announced the move after the conclusion of central bank's bi-monthly policy review meeting. However, he noted that there is no increase in the CRR requirement for banks, which is currently at 4.5 per cent.
As per the central bank, ICRR is a temporary measure to drain excess liquidity from the banking system due to its withdrawal of Rs 2,000 notes. In May this year, the central bank had announced that the notes would be withdrawn from circulation and gave people the option to either deposit the currency in banks or exchange the notes. On August 1, the central bank had announced that the 88 per cent of Rs 2,000 banknotes had returned to the banking system.
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For the unversed, CRR is the proportion of total deposits banks have to keep with the central bank in form of cash deposits.This is not the first time the RBI has announced an ICRR requirement. Back in 2016, the central bank had announced the move following demonetisation of Rs 500 and Rs 1,000 notes.
Commenting on RBI’s decision, Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares and Stock Brokers, notes that the move would drain out liquidity close to Rs 70,000 crore. He says, “The systemic liquidity would still be in surplus. Consequently, the impact would be largely neutral for banks. This in fact would be positive for NBFCs as the short-term interest rate would be lower than what was being anticipated earlier. It is also important to note that that there was expectation of outright CRR or rate hike. Compared to that, the rate now would be lower.”
Anil Gupta, Senior Vice President and Co Group Head - Financial Sector Ratings at ICRA, opines that this move would increase the incremental CRR requirements of banks by almost Rs 90,000-95,000 crore and reduce the liquidity surplus by a similar amount in the banking system. He adds, "As a result, we expect the short-term rate instruments to increase by 15-20 bps in the near term and the call money rates to align closer to repo rate. The impact on the profitability of the banks is expected to be minimal as this is proposed to be a temporary measure."
Talking about the impact on banks, Karan Gupta, Director at India Ratings and Research, says, "This is just a measure being used by RBI to manage the temporary upsurge in system liquidity seen due to multiple reasons including the inflow of Rs 2,000 notes in the banking system. We do not see this resulting in any major impact for banks. RBI remains committed to keep system liquidity at adequate levels."
While analysts maintain that the move might not have a major impact on the banks, both BSE and NSE’s banking indexes reacted negatively to the news.
Impact Of RBI Policy On Stock Markets
After the announcement, the Nifty Bank tumbled over 500 points from the day’s high, even briefly falling below the 44,500 level, which has been a key support level. The index has now rebounded 250 points from the day’s low and is trading 0.5 per cent down at 44,659. The BSE Sensex also touched an intraday low of 65,509 falling nearly 500 points from previous day close of 65,995. BSE Bankex also declined by over 300 points after the announcement. The NSE Nifty50 tumbled 137 points to hit a low of 19,495 from previous day close of 19,632.55.
According to analysts, the 10 per cent incremental CRR is unlikely to have a major impact on the stock markets as it is in line with the RBI’s liquidity adjustment framework.
"The implementation of a 10 per cent incremental Cash Reserve Ratio (CRR) on the growth in Net Demand and Time Liabilities (NDL) between May 19 and July 28 for banks added to the market's unease," Santosh Meena, Head of Research at Swastika Investmart Ltd, says. However, he adds that the policy shift would not significantly impact market sentiment.
Lakshmi Iyer, CEO Investment Strategy, Kotak Alternate Asset Managers Limited, says the incremental CRR hike could dampen short-term bond yields in the near term. Bond prices could witness relief buying as the mood was quite sombre, assuming a very hawkish commentary.
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"Looking ahead, the focal point of market attention is expected to shift towards the impending US inflation figures scheduled for release this evening. There's a discernible risk that the Nifty index might experience a decline towards levels around 19191 and 18888 unless it manages to surpass the 20-Day Moving Average (20-DMA) threshold of 19650," Meena says.
Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, said the incremental CRR would amount to around Rs 70,000–75,000 crore but should be manageable and reviewed before the festive season begins.
