RBI Phases Out Incremental Cash Reserve Ratio (I-CRR) to Maintain Liquidity Stability

RBI Phases Out Incremental Cash Reserve Ratio (I-CRR) to Maintain Liquidity Stability. Image/Mint

Gradual Unveiling of RBI’s Decision: Phased Removal of I-CRR

The Reserve Bank of India (RBI) has taken a significant step to discontinue the incremental cash reserve ratio (I-CRR) in a phased manner, announcing this development on Friday. This strategic move aims to ensure stability in the system’s liquidity without causing sudden disruptions to money markets. The RBI has released a comprehensive plan outlining the gradual release of impounded amounts under the I-CRR.

I-CRR Phase-Out Plan: Systematic Liquidity Management

In line with an assessment of evolving liquidity conditions, the RBI’s decision entails releasing the I-CRR amounts in stages to maintain orderly money market functioning. The central bank has disclosed that it will initiate the process by releasing 25% of the I-CRR maintained on September 9. Subsequently, an additional 25% will be released on September 23. Finally, the remaining 50% of the I-CRR maintained will be unlocked on October 7.

Origins of I-CRR and Temporary Liquidity Measures

The introduction of the incremental cash reserve ratio (ICRR) was initially announced by RBI Governor Shaktikanta Das on August 10, during the monetary policy statement. Under this policy, all scheduled banks were mandated to maintain a 10% ICRR from August 12. This 10% ICRR was applied to the increase in banks’ net demand and time liabilities (NDTL) recorded between May 19, 2023, and July 28, 2023.

Governor Das clarified that this measure aimed to absorb surplus liquidity in the banking system, which had arisen due to various factors, including the reintroduction of ₹2,000 notes into the system. He reiterated that this was a “temporary measure for managing the liquidity overhang.”

Economic Impact of I-CRR Phase-Out

The incremental CRR, according to the RBI’s internal calculations, had a net impact of slightly over ₹1 lakh crore. This phased removal of I-CRR is expected to have a stabilizing influence on the financial sector, ensuring a more gradual adjustment to liquidity conditions.

Positive Response from Banking Stocks

The announcement regarding the discontinuation of I-CRR had an immediate positive effect on banking stocks, as evidenced by the Bank Nifty index trading 0.61% higher at the 45,150 level. Several banking institutions, including Bandhan Bank, Federal Bank, AU Small Finance Bank, SBI, Bank of Baroda, HDFC Bank, and IndusInd Bank, saw their shares rise by 1-2%.

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