RBI Notifications

RBI to discontinue Incremental Cash Reserve Ratio (I-CRR)


From UPSC perspective, the following things are important :

Prelims level: Incremental Cash Reserve Ratio (I-CRR)

Mains level: Not Much

Central Idea

  • The Reserve Bank of India (RBI) announced the phased discontinuation of the Incremental Cash Reserve Ratio (I-CRR) on September 8, 2023.
  • This measure aimed to absorb surplus liquidity created by factors such as the return of Rs 2,000 notes to the banking system.

RBI’s Decision

  • RBI conducted a review and decided to discontinue I-CRR in stages.
  • The central bank aims to release the impounded amounts gradually to avoid sudden shocks to the system’s liquidity, ensuring orderly money market functioning.

Understanding Cash Reserve Ratio (CRR)

  • CRR is a fundamental concept before delving into Incremental Cash Reserve Ratio (ICRR).
  • Banks are mandated to maintain a certain portion of their deposits and specific liabilities in liquid cash with the RBI.
  • CRR serves as a crucial tool in the RBI’s arsenal for managing liquidity in the economy and acts as a safety net during times of banking stress.
  • Currently, banks are required to uphold 4.5% of their Net Demand and Time Liabilities as CRR with the RBI.

Introduction to ICRR

  • I-CRR was introduced on August 10, 2023, as a temporary measure by RBI to absorb surplus liquidity.
  • Banks were required to maintain an I-CRR of 10% on the increase in their Net Demand and Time Liabilities (NDTL) between May 19, 2023, and July 28, 2023.
  • It came into effect from the fortnight starting August 12, 2023.
  • The RBI has the authority to implement an additional measure called Incremental Cash Reserve Ratio (ICRR), in addition to the standard CRR.
  • ICRR is employed during periods characterized by excess liquidity in the financial system.
  • Essentially, ICRR mandates that banks park even more liquid cash with the RBI than what is required under CRR.
  • This serves as a means to further manage and control liquidity in the banking system.

Reason for I-CRR

  • Excessive liquidity emerged due to factors like the return of Rs 2,000 banknotes, RBI’s surplus transfer to the government, increased government spending, and capital inflows.
  • The daily liquidity absorption by RBI in July reached Rs 1.8 lakh crore.
  • Managing surplus liquidity was necessary to maintain price and financial stability.

Impact on Liquidity Conditions

  • I-CRR was expected to absorb over Rs 1 lakh crore of excess liquidity from the banking system.
  • It temporarily shifted the banking system’s liquidity from surplus to deficit on August 21.
  • Factors like GST outflows and central bank selling of dollars contributed to tight liquidity.
  • However, liquidity conditions reverted to surplus from August 24.
  • On September 8, RBI absorbed Rs 76,047 crore of surplus liquidity from the system.

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