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RBI to gradually remove ICRR, freeing up capital for banks


Mumbai: The Reserve Bank of India (RBI) will gradually unwind its requirement of mandating banks to park an additional 10% of their fresh deposits during a specific period with the central bank.

Starting Saturday, 25% of the incremental cash reserve ratio (ICRR) will be released, followed by another 25% on 23 September. The remaining 50% of the ICRR will be released on 7 October, RBI said in a statement on Friday.

In its monetary policy last month, RBI announced a 10% ICRR for banks on the increase in their net demand and time liabilities (NDTL) between 19 May and 28 July. The decision was taken primarily to address the surge in liquidity following the return of 90% of 2,000 notes into the banking system.

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

RBI governor Shaktikanta Das, in the post-monetary policy press conference, had said that the directive to maintain ICRR could withdraw approximately 1 trillion in liquidity from the banking system.

True to that, liquidity has been tight since the imposition of ICRR.

The surplus liquidity in the system currently stands at 76,000 crore, which is still lower than the earlier surplus of 3.5 trillion.

“RBI wants to control liquidity and does not want excess liquidity feeding into inflation. That is why they want to keep system liquidity at around 1 trillion. RBI has calibrated the reduction in ICRR in such a way that it doesn’t impact system liquidity in a big way. The outflow through currency in circulation and forex intervention will largely compensate for the incremental money coming through ICRR,” said Gopal Tripathi, head of treasury at Jana Small Finance Bank.

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Updated: 09 Sep 2023, 12:16 AM IST

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.