The Reserve Bank of India (RBI) has decided to phase out the Incremental Cash Reserve Ratio (I-CRR) in a measured manner, according to a recent announcement. The I-CRR was introduced earlier as a temporary measure to manage liquidity in the banking system.
The RBI stated in a release, “On a review, it has been decided to discontinue the I-cash reserve ratio in a phased manner.” This decision has been made in consideration of the current and evolving liquidity conditions in the financial system.
To ensure that the release of the I-CRR does not disrupt system liquidity or money markets, the RBI plans to release the impounded amounts in stages. Specifically, the central bank will release 25% of the I-CRR maintained on September 9, followed by another 25% on September 23. The remaining 50% of the I-CRR will be released on October 7.
The imposition of the I-CRR was initially announced by RBI Governor Shaktikanta Das during the monetary policy statement on August 10. According to this policy, all scheduled banks were required to maintain a 10% I-CRR starting from August 12. This I-CRR was based on the increase in banks’ net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023.
Governor Das had clarified that the I-CRR was introduced as a temporary measure to manage the surplus liquidity created by various factors, including the return of ₹2,000 notes to the banking system. It was intended to be a short-term tool for liquidity management.
The net impact of the incremental CRR, as per the RBI’s internal calculation, was slightly over ₹1 lakh crore. The announcement of the phased discontinuation of the I-CRR has had a positive impact on banking stocks. The Bank Nifty index, which represents banking stocks, traded 0.61% higher at the 45,150 level following the news. Several banking shares, including those of Bandhan Bank, Federal Bank, AU Small Finance Bank, SBI, Bank of Baroda, HDFC Bank, and IndusInd Bank, rose by 1-2% in response to the development.
This decision by the RBI reflects its efforts to maintain liquidity conditions in an orderly manner while ensuring that the banking system operates smoothly. As economic conditions evolve, central banks like the RBI continue to employ various tools and measures to manage liquidity and support financial stability.