RBI Monetary Policy: 10 Per Cent Incremental CRR To Drain Excess From System After Rs 2,000 Note Withdrawal

The Incremental Cash Reserve Ratio (ICRR) is a temporary measure implemented by the central bank to manage excess liquidity in the banking system

RBI Governor Shaktikanta Das said, "This measure is intended to absorb the surplus liquidity generated by various factors referred to earlier including the return of Rs 2000 notes to the banking system."

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The Reserve Bank of India (RBI) on Thursday said that banks have to maintain a 10 per cent incremental cash reserve ratio (ICRR) from August 12 to drain out the excess money in the system following the withdrawal of the Rs 2,000 currency note. The Incremental Cash Reserve Ratio (ICRR) is a temporary measure implemented by the central bank to manage excess liquidity in the banking system.

The Reserve Bank of India (RBI) on May 19 announced the withdrawal of the Rs 2,000 note. People were given the option to either exchange these notes or deposit them into their bank accounts. On August 1, the RBI said that as of July 31, Rs 3.14 lakh crore worth of Rs 2,000 banknotes, accounting for 88 per cent of those in circulation, had been returned to the banking system. 

Following the August MPC meeting, the RBI Governor Shaktikanta Das said, "It has been decided that with effect from the fortnight beginning August 12, 2023, scheduled banks shall maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023."

"This measure is intended to absorb the surplus liquidity generated by various factors referred to earlier including the return of Rs 2000 notes to the banking system. This is purely a temporary measure for managing the liquidity overhang," Shaktikanta Das said. 

Further adding that the I-CRR will be reviewed on September 8, 2023, or earlier with a view to returning the impounded funds to the banking system ahead of the festival season.

Notably, the regular cash reserve ratio (CRR), which is the portion of money that banks are required to keep with the RBI, remains unchanged at 4.5 per cent.

During the Monetary Policy Press Conference Das also said, "The incremental CRR was considered necessary in the background of the liquidity overhang. We considered it desirable in interest of financial and price stability. It will have an impact on inflation also. It is a purely temporary measure."

"The level of surplus liquidity in the system has gone up in the recent months on the back of return of Rs 2000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows. The overall daily absorption under the liquidity adjustment facility (LAF) was Rs 1.7 lakh crore in June and Rs 1.8 lakh crore in July 2023." he further said. 

Earlier, in November 2016, the RBI introduced a 100 per cent ICRR on the increased net demand and time liabilities (NDTL) of scheduled banks. This aimed to absorb the surplus liquidity after the withdrawal of Rs 500 and Rs 1,000 notes.