Incremental Cash Reserve Ratio (I-CRR)

• The Reserve Bank of India (RBI) announced that it would discontinue the incremental cash reserve ratio (I-CRR) in a phased manner.
• In August 2023, the RBI mandated banks 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, 2023 and July 28, 2023.

About (I-CRR)

• The RBI announced I-CRR as a temporary measure to absorb excess liquidity from the banking system.
• The level of surplus liquidity in the system surged because of the return of Rs 2,000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows.
• The daily absorption of liquidity by the RBI in July was Rs 1.8 lakh crore.
• Excessive liquidity can pose risks to price stability and also to financial stability.
• Hence, efficient liquidity management requires continuous assessment of the level of surplus liquidity so that additional measures are taken as and when necessary to impound the element of excess liquidity.

Impact of I-CRR on liquidity conditions

• The banking system’s liquidity turned deficit for the first time in the current fiscal after the RBI’s I-CRR mandate.
• The tight liquidity condition was also contributed by outflows on account of goods and services tax (GST) and the selling of dollars by the central bank to stem the rupee’s fall.
• The liquidity, as reflected by the amount of money injected by the RBI into the system, stood at Rs 23,644.43 crore on August 21.
• However, the banking system liquidity again turned to surplus from August 24. On September 8, the RBI absorbed Rs 76,047 crore of surplus liquidity from the system.
• The RBI has outlined a schedule for releasing the funds maintained by lenders under the I-CRR:
  • 25% of the funds will be released on September 9.
  • Another 25% will be released on September 23.
  • The remaining 50% will be released on October 7.
• The phased release of funds is intended to provide banks with sufficient liquidity to meet higher credit demand during the upcoming festival season.