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RBI move will suck out ₹1 lakh crore liquidity from banking system
August 11, 2023
While leaving the cash reserve ratio or CRR untouched, Reserve Bank of India (RBI) Governor Shaktikanta Das found a smarter option to absorb surplus liquidity in the banking system – the imposition of incremental CRR. The move will suck out additional liquidity of a little over ₹1 lakh crore from the system.
Under the new guidelines, banks will have to keep an additional ₹10 in cash compared to the ₹4 usually required for every ₹100 incremental deposit received. Flush with liquidity after withdrawal of ₹2,000 notes, banks had received ₹3.14 lakh crore till 31st July as a result, which is, almost 88% of the total ₹2,000 notes in circulation.
“Hiking the CRR would have had monetary policy connotations, so the temporary increase is aimed to be a non-disruptive way of dealing with the issue of excess liquidity in the system in the backdrop of the recent demonetisation of the ₹2,000 notes,” Aurodeep Nandi, India Economist and Vice President at Nomura, said.
The move will exert upward pressure on sentiment and hence interest rates. “We can assume that this will be reversed before the festival/busy season as the RBI could have gone in for OMO to permanently take out liquidity from the system,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
While stating that excessive liquidity can pose risks to price stability and also to financial stability, Das with effect from the fortnight beginning August 12, 2023, scheduled banks shall maintain an incremental CRR of 10% on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023.
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