RBI Decides to Discontinue I-CRR in a Phased Manner

GS Paper III Indian Economy

Context:

The Reserve Bank of India recently decided to discontinue the Incremental Cash Reserve Ratio (I-CRR) in a phased manner.

More about the news:

Stagewise Release: Amounts impounded under the I-CRR would be released in stages so that system liquidity is not subjected to sudden shocks and money markets function in an orderly manner.

Why was I-CRR needed?

The RBI announced I-CRR as a temporary measure to absorb excess liquidity from the banking system. It came into effect from the fortnight starting August 12.
Reasons for Excess Liquidity: The level of surplus liquidity in the system surged because of the return of Rs 2,000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows.
- Under this, all scheduled commercial banks had to maintain an I-CRR of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023.
Excessive liquidity can pose risks to price stability and also to financial stability. Hence, efficient liquidity management requires continuous assessment of the level of surplus liquidity so that additional measures are taken as and when necessary to impound the element of excess liquidity.

Cash reserve ratio (CRR):

Under CRR, the commercial banks have to hold a certain minimum amount of deposit as reserves with the central bank.
The percentage of cash required to be kept in reserves as against the bank’s total deposits, is called the Cash Reserve Ratio.

Incremental Cash Reserve Ratio (I-CRR):

Unlike CRR, which applies to the total deposit base, ICRR specifically targets new deposits.
It is applied to the incremental increase in deposits made by customers within a certain period.
ICRR is a mechanism through which central banks can regulate the cash reserve requirement of banks when there is excess liquidity through the new deposits.
RBI earlier used this tool in 2016, when the system was flooded with higher liquidity due to demonetisation.

News Source: The Hindu