The interest income hit due to the additional cash reserve ratio (CRR) requirement appears negligible for the system, according to an ICICI Securities report.

As most banks have strong surplus liquidity, additional CRR should not impact the credit offtake.

Based on the available data, systemic deposits (or net demand and time liabilities — NDTL) has risen from Rs 197 lakh crore as of May 19, 2023, to Rs 208 lakh crore as of July 14, 2023, while the July 28th data is not available yet, as per the report.

Thus, the incremental NDTL from May 19 is Rs 10 lakh crore and there would be an additional CRR requirement of Rs 1 lakh crore for the system.

Jahnavi Prabhakar, Economist, Bank of Baroda, observed that the incremental change in NDTL between May 19 and July 28 is around Rs 10 lakh crore. Ten per cent of the amount, or Rs 1 lakh crore, is required to be maintained as incremental CRR.

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The MPC can derive some comfort from the fact that core inflation has softened by more than 100 basis points from its recent peak in January 2023.

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What is ICRR, and its impact on liquidity

“If the same is invested in Standing Deposit Facility with a yield of 6.25 per cent, then Rs 520 crore turns out to be the opportunity cost for banks,” Prabhakar said.

The RBI has asked scheduled banks to maintain (with effect from the fortnight beginning August 12, 2023) an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their NDTL between May 19 and July 28. CRR is the cash parked by banks in their specified current account maintained with RBI.

This measure is intended to absorb the surplus liquidity generated by various factors including the return of Rs 2,000 notes to the banking system, RBI’s surplus transfer to the government, pick-up in government spending, and capital inflows.

RBI Governor Shaktikanta Das said I-CRR is purely a temporary measure for managing the liquidity overhang. Even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy.

The I-CRR will be reviewed on September 8 or earlier with a view to returning the impounded funds to the banking system ahead of the festival season. The Governor emphasised that the existing CRR remains unchanged at 4.5 per cent.

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