Liquidity to remain in surplus of over Rs 1 lakh crore despite I-CRR: Experts

Currently the banking system has a surplus of around Rs 2.64 lakh crore, from which the I-CRR will suck out about Rs 1 lakh crore

Liquidity in the banking system is likely to remain in a surplus of over Rs 1 lakh crore for the next two to three months, despite the introduction of the Incremental Cash Reserve Ratio (I-CRR) by the Reserve Bank of India (RBI), said experts.

Currently the banking system has a surplus of around Rs 2.64 lakh crore, from which the I-CRR will suck out about Rs 1 lakh crore, RBI Governor Shaktikanta Das has said. Though this will not seriously lower surplus liquidity, dealers are expecting short-term rates to harden a bit.

“Despite this (I-CRR), the liquidity will remain in a surplus of more than Rs 1 lakh crore for the next 1-2 months,” said Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC.

On August 10, the RBI announced that scheduled banks have to maintain an I-CRR of 10 percent on the increase in their net demand and time liabilities (NDTL) between May 19 and July 28.

This move was to manage the higher surplus liquidity sloshing about in the economy following the return of Rs 2,000 notes to the banking system.

“Given the comfortable liquidity conditions, the temporary tightening should be manageable for the bond market (as rates will not harden much), though individual banks may be  impacted,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

How much liquidity will remain in the system?

Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, has said the incremental NDTL across all scheduled commercial banks during the stated period stands at around Rs 10 lakh crore. Banks have to maintain an additional CRR of 10 percent, or around Rs 1 lakh crore, from the fortnight beginning August 12. This amounts to 0.3 percent of the current NDTL of banks.

Ghosh added that even though the RBI has kept the CRR unchanged at 4.5 percent, this temporary measure amounts to increasing the CRR by 30 basis points (bps), to 4.8 percent.

Why the I-CRR?

The central bank has announced the I-CRR with an aim to manage the higher surplus liquidity in the economy following the return of Rs 2,000 notes to the banking system (after they were withdrawn from circulation).

“This measure is intended to absorb the surplus liquidity generated by various factors, including the return of Rs 2,000 notes to the banking system,” said Das at the press conference following the monetary policy committee meeting on August 10.

In the last few months, the liquidity in the banking system has risen sharply post  the withdrawal of Rs 2,000 banknotes, the transfer of RBI’s surplus to the government, an uptick in government spending, and capital inflows.

Has the RBI used other tools for manage excess liquidity?

The central bank has conducted various variable rate reverse repo (VRRR) auctions of different tenures to manage the large surplus, but  received muted response from banks. Dealers feel this is because banks prefer holding on to the liquidity to avoid seeking funds later under the Marginal Standing Facility (MSF). The MSF allows banks to borrow from the RBI in emergencies at a rate higher than the repo.

Since June, the central bank has conducted 16 VRRR auctions for Rs 18 lakh crore. However, banks parked only Rs 7,73,023 crore in these auctions.