RBI decides to withdraw incremental CRR by Oct 7 in phased manner

Net impact of incremental CRR was estimated to be little more than Rs 1 trn

The Reserve Bank of India (RBI) on Friday said it would discontinue the incremental cash reserve ratio (I-CRR) requirement imposed on banks and return the impounded funds in phases ahead of the festival season when the demand for cash rises.

Out of the total I-CRR maintained, 25 per cent will be disbursed on September 9, another 25 per cent on September 23, and the remaining on October 7. It was estimated that around Rs 1 trillion worth of liquidity was impounded due to the I- CRR requirement.

The central bank in a statement said the decision was taken based on an assessment of current and evolving liquidity conditions so that the “liquidity in the system is not subjected to sudden shocks and money markets function in an orderly manner”.

During the August review of the monetary policy, the RBI mandated all scheduled banks to maintain an I-CRR of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19 and July 28, with effect from August 12.

“It was largely along the expected lines as the market was expecting it to be rolled back in two tranches of 50-50. There might have been some disappointment in the market but it was mostly along the expectations, with the big relief that liquidity would come back to the system before the onset of the festival season,” said Prasanna Patankar, managing director, STCI Primary Dealer Ltd. 

“The RBI normally prefers to keep liquidity in the neutral zone and anything beyond that they try to stabilise it,” he added.

On Thursday, banks parked Rs 76,047 crore of excess funds with the RBI, followed by Rs 93,935 crore on Wednesday. On Monday and Tuesday, the lenders had parked over Rs 1.5 trillion. The liquidity in the system stood at around Rs 2 trillion to Rs 3 trillion before the I-CRR norms kicked in.

“The decision was slightly better than expected. The expectation was that it will be continued as it is. So, gradual rollout is better than expected,” said Vikas Goel, managing director and chief executive officer at PNB GILTS.

“The market did not react because now the important factor is not liquidity. It is more to do with what’s happening in the US,” said Goel.

Investors are apprehensive about potential future interest rate hikes in the US intensified during the week, fueled by multiple economic indicators, signaling ongoing inflationary pressures and labour market tightness.

While announcing the I-CRR decision, the RBI had said it would review it on or before September 8.

Bank stocks reacted positively due to the withdrawal of I-CRR as they will get back the liquidity that can be deployed as loans. Banks do not earn any interest on funds parked with the RBI as CRR.

“The expectations were that there could be an extension of I-CRR by another 15 days,” said Anand Dhama, senior research analyst, Emkay Global Financial Services.

“They have reduced ICRR in a phased manner by extending it by 1 month. So it is partially positive, partially negative. The market has taken it positively in terms of a reduction ultimately. The movement of the banking stocks seems to be the result of I-CRR revision,” Dhama said.

Barring one, all bank Nifty stocks ended in green on Friday, following the RBI announcement.