The Finance Ministry on Monday backed the RBI directive to banks regarding additional cash reserve ratio (CRR) saying the step had become a necessity in view of excessive liquidity in the system post-demonetisation.
"The step had become necessary in context of excessive liquidity in the system to soften the declining bond yields.
It was also due to unusual outflow of hard currency from India," Economic Affairs Secretary Shaktikanta Das told media persons.
The Reserve Bank of India (RBI) on Saturday announced additional cash reserve ratio (CRR) for banks, according to which the banks have to maintain an incremental CRR of 100 per cent on the increase in net demand and time liabilities (NDTL) between September 16, 2016 and November 11, 2016.
The additional CRR directive is effective from November 26.
Simply put, CRR was the percentage of the total deposit that banks have to keep with RBI.
The central bank reiterated that the CRR continues to remain at four per cent of outstanding NDTL.
The RBI will review the incremental CRR on December 9 or earlier.
Post-demonetisation of high-value currency, there has been a surge in bank deposits in relation to the expansion of bank credit, leading to large excess liquidity in the system.
"The magnitude of surplus liquidity available with the banking system is expected to increase further in the fortnights ahead," the RBI said.
As a result, the RBI has decided to absorb a part of this surplus liquidity by applying an incremental CRR as a temporary measure.
The increased liquidity is due to the return of invalid notes into the banking system by way of deposits by account holders.
According to RBI, the incremental CRR will absorb only the excess liquidity while leaving sufficient funds with the banks to lend to productive sectors of the economy.
The central bank also said that it has revived the Guarantee Scheme to enable deposit of banned notes with it or at currency chests and get immediate value.
This measure should also facilitate banks' compliance with the incremental CRR.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)