The Reserve Bank of India (RBI) announced on Friday that it will discontinue the Incremental Cash Reserve Ratio (I-CRR) in a phased manner. The I-CRR, a temporary measure implemented to manage surplus liquidity in the banking system, will begin to be reversed from September 9.
The I-CRR was introduced following RBI Governor Shaktikanta Das' monetary policy statement on August 10. Scheduled banks were required to maintain an I-CRR of 10% on the increase in their net demand and time liabilities (NDTL) between May 19 and July 28. This measure was implemented to absorb surplus liquidity generated by various factors, including the return of INR 2,000 (INR 1 = $0.012) notes to the banking system.
The central bank has now decided to release the amounts impounded under the I-CRR in stages to prevent sudden liquidity shocks and ensure the orderly functioning of money markets. The release schedule is as follows: On September 9 and September 23, 25% of the I-CRR maintained will be released at each stage. On October 7, the remaining 50% will be released.
This phased reversal of the I-CRR is expected to release a little over INR 1 lakh crore back into the system. In the first and second stages, approximately INR 25,000 crore–INR 27,000 crore per stage will be released. In the third stage, an estimated INR 50,000 crore–INR 54,000 crore will be released.
V Ramachandra Reddy, Deputy General Manager (Treasury) at Karur Vysya Bank, said this move is justified as it aligns with advance tax and GST outflows while ensuring liquidity ahead of the festival season. Meanwhile, Chief Economist at Bank of Baroda, Madan Sabnavis, noted that liquidity has been tight since the imposition of I-CRR, and releasing money in tranches helps to smooth out liquidity and avoid a sudden influx of funds.
Manoranjan Sharma, Chief Economist at Infomerics Ratings, said the phased reversal of the I-CRR is particularly significant as historically, liquidity tends to get squeezed in the October-December season. With the surplus liquidity dissipating and the festival season approaching, this course correction is both welcome and contextually significant.
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