The Reserve Bank of India (RBI), on October 6, 2023, announced the withdrawal of the incremental cash reserve ratio (I-CRR) to ease the country’s liquidity condition.
The bank imposed a 10 per cent I-CRR in August 2023, impounding around Rs 1.1 lakh crore from the banking system. The release of the remaining impounded I-CRR funds on October 7 and a pickup in government spending will likely ease the liquidity conditions, RBI said.
The Cash Reserve Ratio (CRR) is a portion of a bank's total deposits held in liquid cash and is maintained with RBI. Banks do not earn interest on this reserve and cannot use it for investment or lending. Unlike CRR, which applies to the total deposit base, I-CRR targets new deposits, the increase in net demand and time liabilities (NDTL) of banks between May 19 and July 28, 2023.
RBI announced to discontinue I-CRR on September 8 in a phased manner by October 7, 2023.
I-CRR was introduced on August 12, 2023, as part of RBI's strategy to absorb excess liquidity from the banking system following the withdrawal of the Rs 2,000 currency note.
RBI reiterated that excessive liquidity can pose risks to both price and financial stability. To ensure liquidity conditions evolve in sync with the monetary policy stance, it imposed a 10 per cent I-CRR (impounding about Rs 1.1 lakh crore from the banking system) as a temporary measure. After a review on September 8, it decided to stop the I-CRR in a phased manner.
It noted that the “festival time” increase in currency demand may, of course, act as a counterbalancing factor. “It is a turning pitch, and we will play our shots carefully. Going forward, while remaining nimble, we may have to consider OMO sales (Open Market Operation sales) to manage liquidity, consistent with the stance of monetary policy. The timing and quantum of such operations will depend on the evolving liquidity conditions,” RBI noted.