The Reserve Bank of India (RBI) will progressively phase out the implementation of the Incremental Cash Reserve Ratio (I-CRR)
Rates and monetary policy decisions by the Reserve Bank of India (RBI) always hold a pivotal role in the context of banking examinations. In the latest development, the RBI has opted to discontinue the Incremental Cash Reserve Ratio (I-CRR). This article aims to provide aspiring candidates with a comprehensive insight into the I-CRR and the rationale behind the RBI’s decision to phase it out.
Why I-CRR Was Necessary?
The inception of the Incremental Cash Reserve Ratio (I-CRR) in 2016 was a transient strategic measure employed by the RBI to absorb the excessive liquidity coursing through the banking system. This surfeit of liquidity stemmed from a confluence of factors, including the reintroduction of Rs 2,000 banknotes into the banking ecosystem, the transfer of surplus funds from the RBI to the government, an upswing in government expenditure, and an influx of capital inflows. During July, the RBI was absorbing liquidity at a daily rate of Rs 1.8 lakh crore.
Date of I-CRR Introduction & Dates of Realization
The I-CRR made its debut on August 10, following a monetary policy review meeting. During this announcement, RBI Governor Shri Shaktikanta Das specified that banks would be obliged to maintain an I-CRR of 10 percent on the augmented portion of their net demand and time liabilities (NDTL) recorded between May 19, 2023, and July 28, 2023. This policy came into effect from the fortnight commencing on August 12. The Reserve Bank of India (RBI) issued a statement on Friday, outlining a phased release of the incremental cash reserve ratio (ICRR). On September 9, a quarter of the ICRR will be liberated, with another 25% set to be released on September 23. The remaining 50% of the ICRR is scheduled for release on October 7. This measured approach to releasing the ICRR aims to manage liquidity effectively and ensure a smooth transition in the financial system.
Impact of I-CRR on Liquidity
- The introduction of I-CRR, combined with other regulatory measures, precipitated several impacts on liquidity within the banking system:
- The liquidity landscape within the banking system shifted from surplus to deficit for the first time in the current fiscal year, with the turning point occurring on August 21.
- This deficit in liquidity could be predominantly attributed to the RBI’s I-CRR directive, which compelled banks to withhold additional reserves.
- Other contributory factors exacerbating the tight liquidity conditions included outflows related to goods and services tax (GST).
In an effort to mitigate the depreciation of the rupee, the central bank also engaged in the sale of foreign currency, which further influenced the liquidity dynamics.
As a result of these collective actions, the measure of liquidity, as quantified by the sum of money infused into the system by the RBI, stood at Rs 23,644.43 crore as of August 2.
In conclusion, the RBI’s decision to discontinue I-CRR signifies a pivotal moment in the realm of monetary policy in India. Understanding the nuances of such policies is vital for candidates preparing for banking examinations, as it showcases the evolving strategies of the central bank and their ramifications on the financial sector.
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