With the Reserve Bank of India (RBI) asking Banks to temporarily maintain incremental cash reserve ratio (I-CRR), there could be tighter liquidity conditions in the banking system, leading to some upward pressure on both credit and deposit rates.

With effect from the fortnight beginning August 12, scheduled banks have to maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19 and July 28. This measure is to suck out excess liquidity from the banking system. CRR is the cash parked by the banks in their specified current account maintained with the RBI.

RBI Governor Shaktikanta Das said this could imply a little over ₹1-lakh crore of liquidity being impounded. The total liquidity in the system (government balances + Liquidity Adjustment Facility/LAF) stood close to ₹3.5-lakh crore, with the LAF balance at ₹2 lakh crore as of August 8, per HDFC Bank’s Economic Research team said in a note.

“Tighter liquidity conditions could imply some upward pressure on both credit and deposit rates as transmission of past rate hikes improves.

“We expect liquidity surplus as measured by the LAF balances to average between ₹1 lakh crore to ₹1.5-lakh crore going forward in Q2 FY24,” said Abheek Barua, Chief Economist, HDFC Bank.

CARE Ratings, in a note, said the systemic liquidity averaged ₹2.3-lakh crore in August 2023, which is ₹1.6-lakh crore higher than the average systemic liquidity in May 2023.

“The recent accretion in liquidity was aided by a pickup in government spending, sustained foreign inflows, and the lingering effect of high-value currency withdrawal.

“RBI’s FX (foreign exchange) purchases in response to a higher-than-expected Balance of Payments (BoP) surplus have also added to the rupee liquidity. RBI now estimates the surplus in BoP to improve from $5.6 billion in Q4 FY23 to $24.4 billion in Q1 FY24,” said Rajani Sinha, Chief Economist, CARE Ratings.

Since June, the RBI has conducted 15 variable rate reverse repo (VRRR) auctions amounting to nearly Rs 7.2 lakh crore.

Consequently, the weighted average call money rate has been hovering around the repo rate of 6.5 per cent.

“Along with the ongoing regular fine-tuning operations, RBI has introduced a temporary provision of incremental cash reserve ratio (I-CRR) for scheduled commercial banks (SCBs) to remove the build-up of excess liquidity in the system.

“We expect this new measure to absorb liquidity worth about Rs 1 lakh crore from the system...However, with the new measure, a lower level of systemic liquidity will push up money market rates and help stem inflationary pressures,” Sinha said.

Nevertheless, systemic liquidity is expected to remain in surplus despite the additional cash reserve requirement under I-CRR.