I-CRR
1. Context
- Recently, the Reserve Bank of India (RBI) announced the gradual discontinuation of the Incremental Cash Reserve Ratio (I-CRR), a measure introduced on August 10, 2023.
- I-CRR was instituted by the RBI to absorb excess liquidity stemming from various factors, including the reintroduction of Rs 2,000 notes into the banking system.
- This liquidity regulation was intended as a temporary measure, subject to review.
2. RBI's Decision
- Following an evaluation of current and evolving liquidity conditions, the RBI opted to phase out I-CRR to ensure that system liquidity experiences a smooth transition, avoiding sudden shocks that could disrupt money market operations.
- This move aims to maintain orderliness in financial markets.
- The RBI outlined a phased release plan for the funds held under I-CRR.
- On September 9, 25% of the funds maintained by banks under I-CRR will be released.
- Another 25% will be released on September 23, with the remaining 50% scheduled for release on October 7.
- This approach ensures that banks will have adequate funds to meet the heightened credit demand anticipated during the upcoming festival season.
3. About CRR
- Cash Reserve Ratio (CRR) is a fraction of the total deposits that commercial banks have to keep with the central bank.
- The RBI sets the CRR, and it is usually expressed as a percentage. For example, if the CRR is 4%, then banks must keep 4% of their deposits with the RBI.
- The CRR is a tool that the RBI uses to control the money supply in the economy.
- When the RBI increases the CRR, it reduces the amount of money that banks have available to lend.
- This can help to slow down inflation. When the RBI decreases the CRR, it increases the amount of money that banks have available to lend. This can help to stimulate economic growth.
- The CRR is also used to ensure the liquidity of the banking system. Liquidity refers to the ability of a bank to meet its short-term financial obligations.
- By requiring banks to hold a certain amount of reserves, the RBI helps to ensure that banks have enough cash to meet their obligations.
3. I-CRR and its Need
- Incremental Cash Reserve Ratio (ICRR) is a reserve requirement on the increase in banks' net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023.
- It was introduced by the Reserve Bank of India (RBI) on August 10, 2023, as a temporary measure to absorb excess liquidity in the banking system.
- The I-CRR was a 10% reserve requirement on the increase in banks' NDTL during the specified period. This meant that banks had to park 10% of the increase in their NDTL with the RBI.
- The RBI had previously indicated that I-CRR would be reviewed on September 8, 2023, or earlier, to return impounded funds to the banking system.
- I-CRR was initiated by the RBI as a temporary measure to absorb surplus liquidity within the banking system.
- The excess liquidity resulted from factors such as the reintroduction of Rs 2,000 banknotes, the RBI's surplus transfer to the government, increased government spending, and capital inflows. In July, the RBI absorbed daily liquidity of Rs 1.8 lakh crore.
- The RBI's measured discontinuation of I-CRR aligns with its commitment to maintaining financial stability and fostering a balanced money market environment.
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For Prelims: I-CRR, RBI, net demand and time liabilities,
For Mains:
1. Analyze the factors that led to the introduction of the Incremental Cash Reserve Ratio (I-CRR) and its impact on the Indian banking system. How does the RBI's decision to phase out I-CRR affect the liquidity management strategies of banks? (250 words)
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Previous Year Questions
1. The Cash Reserve Ratio refers to (CDS GK 2020)
A. the share of Net Demand and Time Liabilities that banks have to hold as liquid assets
B. the share of Net Demand and Time Liabilities that banks have to hold as balances with the RBI
C. the share of Net Demand and Time Liabilities that banks have to hold as part of their cash reserves
D. the ratio of cash holding to reserves of banks
Answer: B
2. With reference to the Indian economy, consider the following statements: (UPSC 2022)
1. An increase in the Nominal Effective Exchange Rate (NEER) indicates the appreciation of the rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct?
A. 1 and 2 only B. 2 and 3 only C. 1 and 3 only D. 1, 2 and 3
Answer: C
3. The terms 'Marginal Standing Facility Rate' and 'Net Demand and Time Liabilities', sometimes appearing in news, are used in relation to (UPSC 2014)
A. banking operations
B. communication networking
C. military strategies
D. supply and demand of agricultural products
Answer: A
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Source: The Indian Express
