Incremental CRR
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Introduction
In Aug 2023, RBI introduced Incremental CRR to absorb the surplus liquidity created in the system due to multiple factors, including the return of Rs 2,000 notes.
- It was decided that wef from the fortnight beginning Aug 12, 2023, scheduled banks shall 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.
- This was purely a temporary measure for managing the liquidity overhang.
- Existing CRR remained unchanged at 4.5%.
- Impact:
- Reduce the supply of money and thus curtail inflation.
In Sep 2023, RBI announced that it will discontinue the I-CRR in a phased manner.
- Why release in phased manner?
- So that system liquidity is not subjected to sudden shocks and money markets function in a orderly fashion.
- RBI released 25% of I-CRR on 9th, Sep; 25% on 23rd Sep and remaining 50% of the I-CRR on 7th October 2023.
About Cash Reserve Ratio:
- Under RBI Act, 1934 – Scheduled Banks are required to keep a % of their net time and demand deposits (i.e. total deposits of customers) in the form of cash deposits with RBI.
Objectives of CRR:
- Since a part of total deposits in bank is available in the form of cash, it can be used to readily make money available to customers when they demand it.
- Further, RBI also controls the amount of money in market and thus inflation through CRR.
Note:
- Banks don’t get any interest for this money deposited with RBI.
- CRR has to be maintained in cash only.