INCREMENTAL
CASH RESERVE RATIO - ECONOMY
News:
Banking system liquidity
turns deficit for first time in FY24 due to I-CRR, tax outflows
What's
in the news?
●
Banking system liquidity turned deficit
for the first time in the current fiscal on August 21 after the Reserve Bank of
India’s (RBI) asked banks to maintain incremental cash reserve ratio (I-CRR),
goods and services tax (GST) outflows and selling of dollars by the central
bank.
Key
takeaways:
●
The liquidity, as reflected by the amount
of money injected by the RBI into the system, stood at Rs 23,644.43 crore on
August 21, the latest RBI data showed.
●
Since the beginning of FY2024, the RBI has
been absorbing excess liquidity from the banking system.
Incremental
Cash Reserve Ratio (ICRR):
●
ICRR is RBI’s new tool to manage liquidity in the banking system.
●
It is a percentage of the incremental
increase in a bank’s net demand and time liabilities (NDTL) that the bank is
required to maintain as cash reserves with the RBI.
●
The RBI had been using other tools such as
variable rate, repo rate and the reverse repo rate, to manage liquidity.
●
As these tools were not having the desired
effect.
●
The ICRR is a more targeted tool that is
specifically designed to absorb excess liquidity.
●
It is a temporary measure which will be
reviewed in three months.
●
Presently, banks are required to retain 4.5 percent of their Net Demand and Time
Liabilities as CRR with the RBI.
ICRR
Vs CRR:
●
ICRR is similar to the CRR, wherein banks
need to set aside a certain portion of their money with the RBI. They do not
earn any interest in this.
●
Likewise, with the I-CRR, banks need to
set aside an additional 10 percent of the NDTL garnered.
Impacts
of ICRR:
●
RBI’s primary objective is to curtail inflation through this tool.
●
It will reduce the amount of money that
banks have to lend, which could lead to higher interest rates.
●
It could probably make it more difficult
for banks to raise capital, and it could impact their profitability.
●
However, the ICRR is also expected to help to stabilize the rupee, which has
been under pressure in recent months.
●
As liquidity is withdrawn, banks will have
limited funds for lending, thereby decreasing demand for goods and services,
and consequently reducing prices.
●
Short-term interest rates might rise due
to tightening of fund supply in the economy, acting as an additional measure to
counter inflation.
●
The introduction of an incremental CRR may
tie up bank resources and exert upward pressure on market rates.
●
While bankers will evaluate the impact,
the temporary shocks can’t be ignored as bankers are expecting an impact of up
to an amount of Rs 1 lakh crore.
●
Impact on NIMs will be minimal since the
duration is only for a month.