10% incremental CRR temporary, will drain out Rs 1 trn from system: RBI

Short-term rates on money market instruments like call money rates, treasury bills and commercial paper are likely to increase by 15-20 bps in the near term: ICRA

The Reserve Bank of India’s decision to impose a temporary 10 per cent incremental cash reserve ratio (I-CRR) is likely to drain out little Rs one trillion from the system, said governor Shaktikanta Das on Thursday.

RBI has done the internal calculation and bank-wise calculation also, said Das in a media interaction after the monetary policy was announced.

Surplus liquidity in the banking system has gone up in recent months due to the return of Rs 2,000 banknotes, RBI’s surplus transfer to the government, increased government spending, and capital inflows.

The overall daily absorption under the liquidity adjustment facility (LAF) was Rs 1.7 trillion in June and Rs 1.8 trillion in July 2023.

The I-CRR will be applicable for the increase in net demand and time liabilities (NDTL) of banks between May 19, 2023 and July 28, 2023. The I-CRR is in addition to the existing cash reserve ratio (CRR) of 4.5 per cent.

RBI would review this measure on or before September 8, 2023 ahead of the festive season, Das said. Even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy.

The decision (on I-CRR) will reduce liquidity surplus, said Anil Gupta, senior vice president, co group head - financial sector ratings, ICRA. As a result, the short-term rates on money market instruments like call money rates, treasury bills and commercial paper are likely to increase by 15-20 bps in the near term. The impact on the profitability of the banks is expected to be minimal as this is a temporary measure, he said.

RBI said despite such surplus liquidity, market response to RBI’s 14-day variable rate reverse repo (VRRR) auctions was lukewarm. Banks preferred to place their surplus liquidity in the less remunerative standing deposit facility (SDF)

Although the fine-tuning VRRR auctions of 1-4 days maturity during this period evoked better response from the market, this essentially reflects greater risk aversion among banks to park large funds under the main operation, Das said.