RBI move may suck more than Rs 1 lakh crore from the banking system
Banks have to park additional money as cash reserve ratio from August 12. The return of the 2,000 rupee notes had led to an increase in liquidity, triggering the move by the Reserve Bank of India. Cash reserve ratio is the proportion of money banks are required to set aside, either as cash or as a deposit with the central bank, instead of lending further. Before today's decision, announced by Governor Shaktikanta Das as part of the bi-monthly monetary policy review, the CRR stood at 4.5 percent. Even if its deposited with the RBI, banks do not earn interest on this amount.
The Reserve Bank of India has asked banks to park an additional 10 percent of Net Demand and Time Liabilities (NDTL), garnered between May 19 and July 28, as incremental cash reserve ratio from August 12. The move may suck out more than Rs 1 lakh crore from the banking system.
What is cash reserve ratio?
Cash reserve ratio is the proportion of money banks are required to set aside, either as cash or as a deposit with the central bank, instead of lending further. Before today's decision, announced by Governor Shaktikanta Das as part of the bi-monthly monetary policy review, the CRR stood at 4.5 percent. Even if its deposited with the RBI, banks do not earn interest on this amount.
The move was triggered by the recent increase in the liquidity (the cash sloshing around in the system). A big chunk of it was due to the return of the 2,000 rupee note.
The increase in mandated reserves, a decision that will be reviewed on September 8, will lead to a rise in short-term rates, according to Dharmakirti Joshi, Chief Economist, CRISIL.
This led to a fall in banking stocks. Nifty Bank fell 500 points from the day's high. While the additional CRR is to be implemented by all, not every bank benefitted from the return of the 2,000 rupee note. "ICICI, HDFCB, Axis amongst banks have maintained strong contingent buffer amongst banks (0.7-1.2 percent) and thus should not have any impact," Arora added.
Earlier, before the clarification from the RBI Governor, Madhavi Arora, Chief Economist at Emkay, had said that "the imposition would imply a temporary liquidity depletion of Rs 99,600 crore assuming an effective CRR of 14.5 percent for the period. However, if we assume the ICRR of 10 percent to include the existing CRR of 4.5 percent, the liquidity depletion would amount to Rs 65,000 crore (ex of HDFC twin merger)."
First Published: Aug 10, 2023 1:04 PM IST
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