The Reserve Bank of India (RBI) has decided to discontinue the Incremental Cash Reserve Ratio (I-CRR), which it prescribed as a temporary measure last month to impound Banks’ surplus liquidity, in three stages, beginning September 9, 2023. By doing so, the central bank is ensuring that there is no liquidity tightness during the upcoming festival season.

Prescribed last month to drain out the banking system’s surplus liquidity, which arose due to the return of ₹2,000 banknotes to the banking system, RBI’s surplus transfer to the government, and a pick-up in government spending and capital inflows, the I-CRR sucked out a little over ₹1-lakh crore.

Three stages

In the first stage (on September 9, 2023) and second stage (September 23, 2023) of the I-CRR reversal, 25 per cent each of the Banks’ impounded funds (or ₹25,000 crore–27,000 crore per stage) will be released. In the third stage (October 7, 2023), the balance of 50 per cent (₹50,000 crore–₹54,000 crore) will be released.

“Based on an assessment of current and evolving liquidity conditions, it has been decided that the amounts impounded under the I-CRR would be released in stages so that system liquidity is not subjected to sudden shocks and money markets function in an orderly manner,” per a RBI statement.

In its last bi-monthly monetary policy review, the RBI asked Banks to maintain an I-CRR of 10 per cent (with effect from the fortnight beginning August 12, 2023) on the increase in their deposits between May 19, 2023, and July 28, 2023. CRR is the slice of deposits Banks have to keep with the RBI.

“The calibrated phase-out of ICRR is a justified move. The central bank has aligned the withdrawal of ICRR with the advance tax and GST outflows and ensured liquidity in the system ahead of the festival season,” said V Ramachandra Reddy, Deputy General Manager (Treasury), Karur Vysya Bank.

Madan Sabnavis, Chief Economist, Bank of Baroda, observed that liquidity has been tight since the imposition of I-CRR.  He underscored that advance tax payments are due next week, and this will put further pressure on liquidity.

Referring to surplus liquidity in the system, which is around ₹75,000 crore of late, he said releasing money in tranches helps to smooth out liquidity and avoid sudden gush of funds.

“Today’s ₹50,000 crore V3R (variable rate reverse repo) auction did not see more than ₹18,670 crore being invested. Banks are careful and watchful here, as this means having funds locked up for two weeks.

“The question is whether this (release of funds via phased I-CRR reversal) will be adequate next week when there are tax outflows. This is because the amount coming in of around ₹25–27,000 crore will cover the outflow through the V3R today and will not leave much surplus,” Sabnavis said.

Manoranjan Sharma, Chief Economist at Infomerics Ratings, opined that now that the surplus liquidity has dissipated and the festival October-December season is approaching, this kind of course correction (phased I-CRR reversal) is welcome and contextually significant.

“This assumes greater significance in light of the fact that historically, liquidity gets squeezed in the October-December season,” he said.