The Reserve Bank of India (RBI) is going to slow down its decision to require banks to deposit an extra 10% of their new deposits with the central bank over a certain period.
On Saturday, the RBI will release 25% of the incremental cash reserve ratio (ICRR) and 25% on 23 September. The remaining 50% will be released on October 7th.
Last month, RBI announced that banks would receive a 10% ICRR on the increase in their net demand and time liabilities (NDTL) from 19 May to 28 July through 4 April. This was primarily due to the surge in liquidity caused by the return of 90% of 2,000 notes into the banking system.
The RBI announced that the ICRR’s release of impounded amounts would be phased out to ensure orderly liquidity and maintain order in money markets, following an assessment of current and evolving liquidity conditions.
Shaktikanta Das, the governor of RBI, stated during the post-monetary policy press conference that the retention of ICRR could result in the withdrawal of roughly 1 trillion of liquidity from the banking sector.
It is true that liquidity has been tight since the implementation of ICRR.
The system’s surplus liquidity has decreased to 76,000 crore, while the previous surplus stood at a low of -3.5 trillion.
According to Gopal Tripathi, the head of treasury at Jana Small Finance Bank, RBI has prioritized maintaining system liquidity at around 1 trillion to prevent excess liquidity from flooding inflation. He further stated that the outflow from currency and forex intervention will largely compensate for the incremental money coming through ICRR.