Banks to maintain 10% incremental CRR from August 12, says RBI governor

The RBI retained the repo rate at 6.5 per cent in the policy.

The Reserve Bank of India on August 10 said that banks have to maintain a 10 percent incremental cash reserve ratio (ICRR) from August 12 as part of the central bank's efforts to drain excess liquidity from the banking system following the withdrawal of the Rs 2,000 currency note.

On May 19, the RBI announced the withdrawal of the Rs 2,000 note, allowing citizens to either exchange the note or deposit it in their accounts. The central bank on August 1 said that Rs 3.14 lakh crore worth of Rs 2,000 banknotes, or 88 percent in circulation, had returned to the banking system by July 31.

ICRR is a temporary measure employed when there is a sudden increase in deposits to drain off the liquidity.

RBI Governor Das highlighted that the central bank considered imposition of ICRR desirable in interest of financial and price stability and banks will have enough liquidity to do their lending operations.

"The incremental CRR was considered necessary in the background of the liquidity overhang. We considered it desirable in interest of financial and price stability. It will have an impact on inflation also. It is a purely temporary measure," Das said.

Madan Sabnavis, Economist with Bank of Baroda, said: "The introduction of an incremental CRR, though on a temporary basis, will impound resources of banks and have an upward impact on market rates."

Here, Madhavi Arora, Chief Economist, Emkay Global, highlighted that ICRR imposition will help in imply a temporary liquidity depletion.

"Imposition of ICRR on NDTL would imply a temporary liquidity depletion of ~Rs1.15tn/Rs996bn (ex of HDFC twin merger). This assumes an effective CRR of 14.5% for the period concerned (4.5%+10%)," Arora said.

But Arora also highlighted that there is a need for a clarity on the inclusion of existing CRR in ICRR.

"However, if we assume the ICRR of 10 percent to include the existing CRR of 4.5 percent, the liquidity depletion would amount to Rs650bn/Rs548 bn ex of HDFC twin merger. We await clarity on RBI’s assessment of ICRR in the press conference. But we believe it has to be the former," Arora said.

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Earlier, in November 2016, the central bank announced an ICRR of 100 percent of the increase in net demand and time liabilities (NDTL) of scheduled banks. It was intended to absorb a part of the large increase in liquidity in the system following the withdrawal of the legal tender status of Rs 500 and Rs 1,000 denomination bank notes.

MPC on repo rate

The monetary policy committee (MPC) has on August 10 unanimously voted to leave the repo rate unchanged at 6.5 percent, RBI Governor Shaktikanta Das announced today.

The Standing Deposit Facility rate also retained at 6.25 percent; and Marginal Standing Facility rate, Bank Rate also retained at 6.75 percent.

The MPC has also decided to remain focused on withdrawal of accommodation with preparedness to act should situation so warrant.

The RBI held interest rates unchanged for the third successive time in the current financial year.