Demonetisation: RBI introduces incremental CRR to manage excess liquidity
To absorb the surge in liquidity in the banking system following demonetisation, the Reserve Bank introduced an incremental Cash Reserve Ratio (CRR) of 100 per cent for the fortnight beginning Saturday.
CRR is the portion of the deposits which banks are required to park to the RBI. Currently it is at 4 per cent. As per the RBI guidelines, “on the increase in NDTL (net demand and time liabilities) between September 16 and November 11 scheduled banks shall maintain an incremental CRR of 100 per cent, effective the fortnight beginning November 26, 2016.” As per the estimates, this could be Rs 3.5 lakh crore.
RBI said it will review the decision on December 9 or earlier as the incremental CRR is intended to be a temporary measure within RBI’s liquidity management framework to drain excess liquidity in the system. The regular CRR will continue to be at 4 per cent.
With the withdrawal of legal tender status of Rs 500 and Rs 1,000 bank notes from November 9, 2016, there has been a surge in deposits relative to bank credit expansion, leading to large excess liquidity in the system, it said.
RBI observed that the magnitude of surplus liquidity available with the banking system is expected to rise further in the fortnights ahead. “In view of this, it has been decided to absorb a part of this surplus liquidity by applying an incremental CRR as a purely temporary measure,” it said.