RBI asks banks to maintain incremental CRR (I-CRR)

The Reserve Bank of India (RBI) has asked banks to maintain an incremental Cash Reserve Ratio (ICRR) of 10 per cent on the increase in their deposits between May 19 and July 28 to suck out excess liquidity in the banking system. Bank does not earn interest on CRR maintained with RBI and neither can it use for investing and lending purpose.

“RBI NOTIFICATION”

 

The Chairperson / CEOs of all Scheduled Commercial Banks / Regional Rural Banks /
All Scheduled Primary (Urban) Co-operative Banks / All Scheduled State Co-operative Banks

Madam / Dear Sir,

Reserve Bank of India Act, 1934 – Section 42(1A) – Requirement for maintaining additional CRR

Under Section 42(1) of the Reserve Bank of India Act, 1934, all Scheduled Banks are required to maintain with Reserve Bank of India a Cash Reserve Ratio (CRR) of 4.50 per cent of Net Demand and Time Liabilities (NDTL).

2. On a review of the current liquidity conditions, it has been decided to issue a directive under Section 42(1A) of the Reserve Bank of India Act, 1934 requiring all Scheduled Commercial Banks / Regional Rural Banks / all Scheduled Primary (Urban) Co-operative Banks / all Scheduled State Co-operative Banks to maintain with the Reserve Bank of India, effective from the fortnight beginning August 12, 2023, an incremental CRR (I-CRR) of 10 per cent on the increase in NDTL between May 19, 2023 and July 28, 2023. The I-CRR will be reviewed on September 8, 2023 or earlier.
3. A copy of the relative notification DOR.RET.REC.30/12.01.001/2023-24 dated August 10, 2023 is enclosed.

Yours faithfully,

(BrijRaj)
Chief General Manager

 

DOR.RET.REC.30/12.01.001/2023-24 – Notification

In exercise of the powers conferred by sub-section (1A) of Section 42 of the Reserve Bank of India Act, 1934, the Reserve Bank of India hereby directs that all Scheduled Commercial Banks / Regional Rural Banks / all Scheduled Primary (Urban) Co-operative Banks / all Scheduled State Co-operative Banks, shall maintain with the Reserve Bank of India, with effect from the fortnight beginning August 12, 2023:

1. an additional average daily balance over and above the average daily balance required to be maintained under sub-section (1) of Section 42; and
2. that the amount of such additional average daily balance shall not be less than 10 per cent of the increase in net demand and time liabilities between May 19, 2023 and July 28, 2023.

 

This measure is to suck out excess liquidity from the banking system. CRR is the cash parked by the banks in their specified current account maintained with the RBI.

This measure is temporary intended to absorb the surplus liquidity generated by various factors including the return of ₹2,000 notes to the banking system. Liquidity surplus in the banking system has averaged around ₹2.5 lakh crore in August, up from ₹1.6 lakh crore in July, pushing down overnight borrowing and lending rates.

Incremental CRR may push up short-term rates by 15-20 bps. The move will remove a little over Rs 1 lakh crore from the banking system, pushing up short-term rates of money market instruments like treasury bills, commercial papers, call money, etc.

Since the withdrawal of Rs 2,000 banknotes from circulation, yields on short-term debt instruments such as commercial papers (CPs), certificates of deposit (CDs), and treasury bills had eased by 10-15 bps. Incremental CRR It will have an impact on the inflation situation also.