A withdrawal of the Incremental Cash Reserve Ratio (I-CRR) in a phased manner is likely to ease pressure of the heavy outflows from the banking system later this month on account of tax and auction related payments, money market experts told Moneycontrol.
This is because the return of these funds, along with other inflows in the banking system, will offset the outflows in September.
The central bank, on September 8, took the decision to discontinue the I-CRR in a phased manner, after the review. It added that the amount under I-CRR would be released in stages, so that system liquidity is not subjected to sudden shocks and money markets function in an orderly manner.
“Phased withdrawal of I-CRR will help to ease outflow pressure on account of goods and services tax (GST) and advance tax of more than Rs 2.25 lakh crore,” said Arun Bansal, Executive Director Head of Treasury, IDBI Bank.
Money market dealers said liquidity in the banking system is likely to come under pressure after the outflows of advance tax payment worth around Rs 1 lakh crore on September 15, and the GST payment worth Rs 1.5 lakh crore on September 20.
Further, pressure will increase due to auction related outflows.
However, there will be some inflows from redemption of bonds and coupon payments during the month, which will also ease the pressure.
According to Ajay Manglunia, managing director and head of the investment group at JM Financial, withdrawal of the I-CRR in a phased manner is most appropriate now as it would coincide with the income tax and GST outflows of September.
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How will the I-CRR funds be released?
The Reserve Bank of India (RBI), in a release on September 8, said that 25 percent of the funds maintained in the I-CRR would be released on September 9 and 25 percent on September 23. The remaining 50 percent will be released October 7.
The first release will take place just before the advance tax payment and the second one after GST payments.
The remaining funds will be released just before the start of the festival season, when currency in circulation and credit demand increase, dealers said.
The central bank said these funds would be released in a phased manner to avoid liquidity and money market shocks.
On August 10, the RBI asked scheduled banks to maintain an I-CRR of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023.
The measure was intended to absorb the surplus liquidity generated by various factors, including the return of Rs 2000 notes to the banking system.
Will liquidity remain surplus?
Money market dealers said liquidity is likely to remain neutral to slightly surplus after the tax outflows from the banking system.
This is because the second round of withdrawal will take place just after the GST payments.
“It can be assumed that the banking system will be neutral or (have a) marginal surplus post tax outflows,” Manglunia added.
Currently, liquidity in the banking system is in surplus of around Rs 76,047.44 crore (as on September 7).
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Impact on money market rates
Dealers do not see any major impact on rates as liquidity is likely to remain in surplus.
However, Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincorp, said with advance tax outflows at the half yearly closing nearing, banks may try to issue more certificates of deposit and Tier 2 bonds.
“A few banks have already lined up to issue tier 2 bonds now,” Srinivasan added.
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