The Reserve Bank of India (RBI) is set to gradually eliminate the Incremental Cash Reserve Ratio (ICRR), thereby releasing capital that banks are required to park with the central bank. This move is aimed at addressing the liquidity situation in the banking system.
Starting this Saturday, 25% of the ICRR will be released, followed by another 25% on September 23rd. The remaining 50% of the ICRR will be freed up on October 7th, as stated by the RBI in a recent announcement.
In its previous monetary policy, the RBI had mandated a 10% ICRR for banks based on the increase in their Net Demand and Time Liabilities (NDTL) between May 19th and July 28th. This decision was primarily made to manage the surge in liquidity caused by the return of 90% of Rs. 2,000 notes into the banking system.
The RBI's rationale for this phased release of the ICRR is to ensure that the system's liquidity experiences a gradual adjustment, preventing abrupt disruptions to money markets and ensuring their orderly functioning. RBI Governor Shaktikanta Das had estimated that maintaining the ICRR could withdraw approximately Rs. 1 trillion in liquidity from the banking system, and this move aims to mitigate that impact.
Indeed, since the introduction of the ICRR, liquidity in the system has been relatively tight. Currently, there is a surplus liquidity of Rs. 76,000 crore, significantly lower than the earlier surplus of Rs. 3.5 trillion.
The RBI's objective is to exercise control over liquidity to prevent excessive liquidity from contributing to inflation. Therefore, they aim to maintain system liquidity at around Rs. 1 trillion. The reduction in the ICRR has been carefully calibrated to avoid a significant impact on system liquidity, with the outflow through currency in circulation and forex intervention expected to offset the incremental funds released through the ICRR, according to Gopal Tripathi, the head of treasury at Jana Small Finance Bank.
RBI Ends Incremental Cash Reserve Ratio for Banks, Phases Out Funds
