Central Idea

The Reserve Bank of India (RBI) announced the phased discontinuation of the Incremental Cash Reserve Ratio (I-CRR) on September 8, 2023.
This measure aimed to absorb surplus liquidity created by factors such as the return of Rs 2,000 notes to the banking system.

RBI’s Decision

RBI conducted a review and decided to discontinue I-CRR in stages.
The central bank aims to release the impounded amounts gradually to avoid sudden shocks to the system’s liquidity, ensuring orderly money market functioning.

CRR is a fundamental concept before delving into Incremental Cash Reserve Ratio (ICRR).
Banks are mandated to maintain a certain portion of their deposits and specific liabilities in liquid cash with the RBI.
CRR serves as a crucial tool in the RBI’s arsenal for managing liquidity in the economy and acts as a safety net during times of banking stress.
Currently, banks are required to uphold 4.5% of their Net Demand and Time Liabilities as CRR with the RBI.

I-CRR was introduced on August 10, 2023, as a temporary measure by RBI to absorb surplus liquidity.
Banks were required to maintain an I-CRR of 10% on the increase in their Net Demand and Time Liabilities (NDTL) between May 19, 2023, and July 28, 2023.
It came into effect from the fortnight starting August 12, 2023.
The RBI has the authority to implement an additional measure called Incremental Cash Reserve Ratio (ICRR), in addition to the standard CRR.
ICRR is employed during periods characterized by excess liquidity in the financial system.
Essentially, ICRR mandates that banks park even more liquid cash with the RBI than what is required under CRR.
This serves as a means to further manage and control liquidity in the banking system.

Excessive liquidity emerged due to factors like the return of Rs 2,000 banknotes, RBI’s surplus transfer to the government, increased government spending, and capital inflows.
The daily liquidity absorption by RBI in July reached Rs 1.8 lakh crore.
Managing surplus liquidity was necessary to maintain price and financial stability.

I-CRR was expected to absorb over Rs 1 lakh crore of excess liquidity from the banking system.
It temporarily shifted the banking system’s liquidity from surplus to deficit on August 21.
Factors like GST outflows and central bank selling of dollars contributed to tight liquidity.
However, liquidity conditions reverted to surplus from August 24.
On September 8, RBI absorbed Rs 76,047 crore of surplus liquidity from the system.