Incremental Cash Reserve Ratio (I-CRR)
Incremental Cash Reserve Ratio (I-CRR) is a temporary measure announced by the Reserve Bank of India (RBI) to absorb surplus liquidity from the Indian banking system. This reserve is in addition to the Cash Reserve Ratio (CRR) which all Scheduled Commercial Banks (SCB) should maintain with RBI. I-CRR is also mandatory for SCBs. However, this additional reserve is adopted as a temporary measure and proposed on the incremental deposit mobilised during a specified period, thereby earning the name, Incremental Cash Reserve Ratio.
What are the differences between Cash Reserve Ratio (CRR) and Incremental Cash Reserve Ratio (I-CRR)?
Cash Reserve Ratio (CRR) is the mandatory amount to be deposited by a bank in India with the RBI, banking regulator of the country. CRR is to be maintained in relation to the net Demand and Time Liabilities (NDTL) of the bank. Cash Reserve Ratio is used by the RBI as a tool to manage liquidity of the banking system and to ensure safety and solvency of banks.
Incremental Cash Reserve Ratio is also similar in characteristics to CRR. However, I-CRR is short term in nature and is proposed on deposits mobilised by banks during a certain window. This tool is mainly intended for absorbing surplus liquidity in the banking system so as to tame inflation.
What is the announcement of RBI on Incremental Cash Reserve Ratio (I-CRR)?
RBI has directed that banks in India should maintain an additional cash reserve of 10% on the incremental deposits mobilised during the period between May 19 and July 28, 2023. Therefore, banks are required to maintain cash reserve with RBI at enhanced rate on the incremental deposit. This measure, in effect will reduce the funds available with the banks impacting their ability to lend and invest.
RBI has announced an ICRR of 10% for the incremental deposits made between May 19 and July 28, 2023. Since there is no change in the existing CRR of 4.5%, with the I-CRR, the effective Cash Reserve Ratio for the period becomes 14.5%. It is expected that banks would be required to maintain funds in the range of Rs 1 lakh to 1.15 lakh with RBI as I-CRR. The I-CRR is proposed to be reviewed on September 8, 2023.
Why did RBI propose Incremental Cash Reserve Ratio (I-CRR)?
To bring the economy back on track consequent to the onslaught of Covid 19 pandemic, the RBI had announced various measures to inject liquidity into the system and reduce the lending rate. This had resulted in surplus liquidity in the banking system causing the inflation to go up. As the economy picked up, for taming inflation the RBI announced tightening measures and inflation had been coming down. However, in recent past the inflation again went up beyond expectation of RBI mainly due to the price escalation of vegetables. Inflation is mostly a bye-product of surplus liquidity and the liquidity in the banking system in the recent past has been on a higher side for the following reasons:
• Excess liquidity resulted from return of Rs. 2,000 notes to the banks
• Transfer of RBI’s surplus to the government
• Increased government spending
• Increased capital inflows
According to the RBI estimate, surplus liquidity has been to the tune of Rs 2.11 lakh crore. Even after the proposed announcement of I-CRR, the banking system will continue to have surplus liquidity of more than Rs. 1 lakh crore.
The RBI uses various tools like CRR, SLR, Open Market Operations(OMO), auctions, Repo rate etc to control liquidity in the banking system and to control inflation. As per RBI’s assessment the uptick seen in the inflation is temporary in nature and is caused by escalated vegetable prices and is expected to come down shortly. As the hike in the inflation is seen as a temporary measure, I-CRR is proposed without applying conventional tools to minimise the impact on overall economy. The impact of I-CRR is expected to influence only short-term lending rates up to say maximum 3 months, which may see an increase of 10-15 bps (10-15%).
