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RBI to discontinue I-CRR: What does it mean and what would be its impact?

The Reserve Bank of India (RBI) on Friday (September 8) announced that it would discontinue the incremental cash reserve ratio (I-CRR) in a phased manner. The central bank will release the amount which banks have maintained under I-CRR in stages.

The I-CRR was introduced on August 10, 2023, by the RBI to absorb the surplus liquidity generated by various factors, including the return of Rs 2,000 notes to the banking system. The regulator had said that I-CRR was a temporary measure, which will be reviewed on September 8, 2023 or before.

What has RBI said?

The RBI said that after a review, it has decided to discontinue the I-CRR in a phased manner.

“Based on an assessment of current and evolving liquidity conditions, it has been decided that the amounts impounded under the I-CRR would be released in stages so that system liquidity is not subjected to sudden shocks and money markets function in an orderly manner,” the RBI said in a release.

As per the schedule, the RBI will release the 25 per cent of funds maintained by lenders under the I-CRR on September 9. Another 25 per cent of the amount maintained under I-CRR will be released on September 23 and the balance 50 per cent on October 7, the RBI said.

Festive offer

This will mean that banks will have sufficient funds to meet higher credit demand during the upcoming festival season.

When was I-CRR introduced?

On August 10, after announcing the monetary policy, RBI Governor Shaktikanta Das said that banks will have to maintain an 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. It came into effect from the fortnight starting August 12.

The RBI said it will review I-CRR on September 8, 2023, or earlier with a view to returning the impounded funds to the banking system ahead of the festival season. The regulator, however, left the CRR unchanged at 4.5 per cent.

Why was I-CRR needed?

The RBI announced I-CRR as a temporary measure to absorb excess liquidity from the banking system. The level of surplus liquidity in the system surged because of the return of Rs 2,000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows. The daily absorption of liquidity by the RBI in July was Rs 1.8 lakh crore.

“Excessive liquidity can pose risks to price stability and also to financial stability. Hence, efficient liquidity management requires continuous assessment of the level of surplus liquidity so that additional measures are taken as and when necessary to impound the element of excess liquidity,” Das had said in August after announcing the I-CRR measure.

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What was the impact of I-CRR on liquidity conditions?

RBI Governor Shaktikanta Das had said the I-CRR measure will absorb above Rs 1 lakh crore of excess liquidity from the banking system.

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The banking system’s liquidity turned deficit for the first time in the current fiscal on August 21 after the RBI’s I-CRR mandate. The tight liquidity condition was also contributed by outflows on account of goods and services tax (GST) and the selling of dollars by the central bank to stem the rupee’s fall. The liquidity, as reflected by the amount of money injected by the RBI into the system, stood at Rs 23,644.43 crore on August 21.

However, the banking system liquidity again turned to surplus from August 24. On September 8, the RBI absorbed Rs 76,047 crore of surplus liquidity from the system.

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What is CRR?

The Cash Reserve Ratio (CRR) is the minimum amount of the total deposits which banks have to maintain as cash reserve with the Reserve Bank of India. It is an essential tool to maintain the health of the banking system. Banks cannot use this amount for lending or for any investment purposes. Currently, CRR stands at 4.5 per cent.

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