RBI to discontinue the Incremental Cash Reserve Ratio (I-CRR) in a phased manner; details inside!

Today, the Reserve Bank of India announced its decision to discontinue the Incremental Cash Reserve Ratio (I-CRR) in a phased manner. This decision comes after a careful assessment of current and evolving liquidity conditions in the financial market.

Before moving on to the incremental cash reserve ratio, we need to understand the cash reserve ratio (CRR) first. Banks are required to maintain liquid cash amounting to a certain proportion of their deposits and certain other liabilities with the RBI.

RBI does this to control the liquidity in the economy and can also act as a buffer in periods of bank stress. The I-CRR, like the Cash Reserve Ratio (CRR), requires banks to set aside a portion of their funds with the RBI.

Earlier RBI announced that with effect from August 12, 2023, scheduled banks shall maintain an incremental cash reserve ratio (I-CRR) of 10% on the increase in their net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023.

This measure was intended to absorb the surplus liquidity generated by various factors referred to earlier including the return of Rs 2000 notes to the banking system. This was purely a temporary measure for managing the liquidity overhang.

Initially, the RBI had said they would review this rule on September 8, 2023, or maybe even earlier, with the idea of giving the locked-up money back to the banks before the festival season.

After reviewing, they decided to stop using the I-CRR slowly, step by step. This way, they want to make sure that there’s enough money in the system. According to the RBI’s press release, this move is aimed at maintaining financial stability and ensuring that markets operate smoothly.

Indeed, this is good news for banks, as they will have to set aside a smaller amount with the RBI and can lend more money to generate income. Following this news, Nifty Bank and banking stocks started gaining momentum.

Earlier RBI said in a statement, as the data received from the banks, the total value of Rs 2,000 banknotes received back from circulation is Rs 3.32 lakh crore up to August 31, 2023. Consequently, the value of Rs 2,000 banknotes in circulation as of the close of business on August 31, 2023, stood at Rs 24,000 crore. Thus, 93% of the Rs 2,000 banknotes in circulation as of May 19, 2023, have since been returned.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.