The Reserve Bank of India (RBI) has announced a new directive related to the Cash Reserve Ratio (CRR) requirement for banks. This directive is aimed at managing liquidity conditions in the banking sector.
Background: As per Section 42(1) of the Reserve Bank of India Act, 1934, all scheduled banks are required to maintain a Cash Reserve Ratio (CRR) with the RBI. CRR is the portion of a bank’s total deposits that it needs to keep with the central bank as a reserve. This is a monetary policy tool used by the RBI to control the money supply in the economy.
New Directive: In response to the current liquidity conditions, the RBI has issued a directive under Section 42(1A) of the Reserve Bank of India Act, 1934. This directive mandates all Scheduled Commercial Banks, Regional Rural Banks, Scheduled Primary (Urban) Co-operative Banks, and Scheduled State Co-operative Banks to maintain an incremental Cash Reserve Ratio (I-CRR) of 10% on the increase in Net Demand and Time Liabilities (NDTL) between May 19, 2023, and July 28, 2023.
Implementation: The directive will be effective from the fortnight beginning August 12, 2023. Banks are required to maintain an additional average daily balance over and above the balance required under the existing CRR provisions. This additional average daily balance should not be less than 10% of the increase in net demand and time liabilities between the specified dates.
Review and Monitoring: The incremental Cash Reserve Ratio (I-CRR) will be reviewed by the RBI on September 8, 2023, or earlier. This review will likely consider the impact of the directive on liquidity conditions and its effectiveness in managing the money supply in the economy.
Conclusion: The RBI’s directive regarding the incremental Cash Reserve Ratio reflects its commitment to managing liquidity conditions in the banking sector and ensuring the stability of the financial system. This move also highlights the central bank’s proactive approach to using monetary policy tools to address economic challenges and maintain a balanced financial environment. Banks will need to adjust their operations and balances accordingly to comply with the new requirements set forth by the RBI.
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Reserve Bank of India
RBI/2023-24/52 DOR.RET.REC.29/12.01.001/2023-24 Dated: August 10, 2023
The Chairperson / CEOs of all Scheduled Commercial Banks / Regional Rural Banks / All Scheduled Primary (Urban) Co-operative Banks / All Scheduled State Co-operative Banks
Madam / Dear Sir,
Reserve Bank of India Act, 1934 – Section 42(1A) – Requirement for maintaining additional CRR
Under Section 42(1) of the Reserve Bank of India Act, 1934, all Scheduled Banks are required to maintain with Reserve Bank of India a Cash Reserve Ratio (CRR) of 4.50 per cent of Net Demand and Time Liabilities (NDTL).
2. On a review of the current liquidity conditions, it has been decided to issue a directive under Section 42(1A) of the Reserve Bank of India Act, 1934 requiring all Scheduled Commercial Banks / Regional Rural Banks / all Scheduled Primary (Urban) Co-operative Banks / all Scheduled State Co-operative Banks to maintain with the Reserve Bank of India, effective from the fortnight beginning August 12, 2023, an incremental CRR (I-CRR) of 10 per cent on the increase in NDTL between May 19, 2023 and July 28, 2023. The I-CRR will be reviewed on September 8, 2023 or earlier.
3. A copy of the relative notification DOR.RET.REC.30/12.01.001/2023-24 dated August 10, 2023 is enclosed.
Yours faithfully,
(Brij Raj)
Chief General Manager
DOR.RET.REC.30/12.01.001/2023-24
August 10, 2023
NOTIFICATION
In exercise of the powers conferred by sub-section (1A) of Section 42 of the Reserve Bank of India Act, 1934, the Reserve Bank of India hereby directs that all Scheduled Commercial Banks / Regional Rural Banks / all Scheduled Primary (Urban) Co-operative Banks / all Scheduled State Co-operative Banks, shall maintain with the Reserve Bank of India, with effect from the fortnight beginning August 12, 2023:
i. an additional average daily balance over and above the average daily balance required to be maintained under sub-section (1) of Section 42; and
ii. that the amount of such additional average daily balance shall not be less than 10 per cent of the increase in net demand and time liabilities between May 19, 2023 and July 28, 2023.
(Jayant Kumar Dash)
Executive Director
