RBI introduces incremental CRR to manage excess liquidity in banking system
The Reserve Bank of India (RBI) has introduced an incremental Cash Reserve Ratio (CRR) of 100% for fortnight to absorb excess liquidity in the banking system following demonetisation.
CRR is the proportion of deposits that banks have to keep as cash with the RBI (or the central bank). Banks do not earn any interest on CRR balances kept with the RBI.
What RBI decision says?
- Banks have to maintain 100% CRR for incremental deposits they received between September 16, 2016 and November 11, 2016.
- The incremental CRR requirement will be temporary measure and it is within RBI’s ‘liquidity management framework’.
- However, overall CRR requirement will stay at 4%. The incremental CRR will be reviewed on December 9, 2016 or even earlier.
After Union Government announced demonization of old Rs. 500 and Rs. 1,000 notes on November 8, 2016, banks started depositing and exchanging those notes. The deposits in banks had swelled by Rs.3.24 lakh crore between September 16 and November 11, 2016. The last fortnight of September 2016 saw deposit mobilisation jump by Rs.3.5 lakh crore.
- It is intended to absorb a part of the surplus liquidity arising from the return of specified bank notes to the banking system.
- Thus, it leaves adequate liquidity with banks to meet the credit needs of the productive sectors of the economy
- It will only have a marginal impact on bank’s cost of funds since it was a temporary measure.