On August 10, the Reserve Bank of India (RBI) asked banks to maintain an incremental Cash Reserve Ratio (ICRR) of 10 per cent on the increase in their deposits.
About ICRR
- Banks are required to maintain liquid cash amounting to a certain proportion of their deposits and certain other liabilities with the RBI. This is a tool of RBI to control the liquidity in the economy and can also act as a buffer in periods of bank stress.
- Banks are currently required to maintain 4.5 per cent of their Net Demand and Time Liabilities (NDTL) as CRR with the RBI.
- RBI has the option to impose incremental credit reserve ratio, in addition to the CRR, in periods of excess liquidity in the system and the central bank is now exercising it.
- Banks will now have to park more liquid cash with the RBI.
- RBI has stated in its monetary policy that from August 12, 2023, all scheduled banks should maintain an additional cash reserve ratio amounting to 10 per cent of the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023.
- The RBI announced the discontinuation of Rs 2,000 notes, leading to substantial deposit inflows in banks. The RBI’s intention is to to absorb some of this liquidity from the system.
- RBI’s main intention is to contain inflation though this tool. As liquidity is sucked out, banks will have lesser money to lend, thus bringing down demand for goods and services, thus bringing down prices.
- Short-term interest rates can move higher as the supply of funds get tight in the economy. That is another tool to bring down inflation.
