Banks who were relieved to find no changes in the policy repo rate were shocked when the Reserve Bank of India (RBI) whacked them with an incremental cash reserve ratio (I-CRR) of 10 per cent that will absorb Rs 1 lakh crore (trillion) from the banking system.

However, I-CRR is only a temporary measure with the RBI reviewing it on September 8, 2023, or earlier wherein a decision will be taken on whether it should be returned back to banks given the upcoming festival season.

It comes on top of instruments such as CRR which is the percentage of bank deposits that should be maintained with the RBI in liquid cash. CRR now stands at 4.50 per cent.

RBI governor Shaktikanta Das said they resorted to I-CRR as the banking system witnessed a gush of liquidity after it announced the withdrawal of Rs 2000 notes.
The RBI fears that this rise in liquidity will fan inflation.

According to the RBI, excessive liquidity, can pose risks to price stability and also to financial stability and additional measures need to be taken to impound excess liquidity.

It therefore decided that with effect from the fortnight beginning August 12, 2023, scheduled banks will maintain I-CRR of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19 and July 28, 2023.

“Even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy,’’ the RBI added.

At a press conference after the decision, Das said that the amount that will be held is little over Rs 1 lakh crore.

This is the second time that the RBI is using the tool to suck liquidity. In November 2016, the RBI had said that banks will have to maintain I-CRR of 100 per cent of the increase in banks’ NDTL from September 16-November 11, 2016.