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RBI Introduces 10% Incremental CRR to Manage Liquidity Impact After Rs 2,000 Note Withdrawal

10 Aug 2023 , 03:22 PM

The Reserve Bank of India (RBI) has announced that banks must maintain a 10% incremental cash reserve ratio (ICRR) from August 12, as part of measures to counteract excess liquidity in the banking system following the withdrawal of the Rs 2,000 currency note. This move comes after the RBI’s decision to withdraw the Rs 2,000 note on May 19, allowing citizens to exchange or deposit it. As of July 31, Rs 3.14 lakh crore worth of Rs 2,000 banknotes, constituting 88% of circulation, had been returned to the banking system.

Incremental CRR is a temporary mechanism used during abrupt deposit increases to reduce liquidity. RBI Governor Das emphasized that this measure promotes financial and price stability and ensures banks have sufficient liquidity for lending. Das clarified that the incremental CRR is a short-term strategy aimed at managing the liquidity surplus and its effects on inflation.

In November 2016, the RBI introduced an ICRR of 100% of the increase in net demand and time liabilities (NDTL) of scheduled banks. This move aimed to absorb liquidity after the withdrawal of legal tender status for Rs 500 and Rs 1,000 denomination notes.

Regarding the Monetary Policy Committee (MPC), on August 10, it unanimously decided to maintain the repo rate at 6.5%. The Standing Deposit Facility rate and the Marginal Standing Facility rate also remain unchanged at 6.25% and 6.75%, respectively. The MPC is committed to a gradual withdrawal of accommodation but stands ready to react as needed. This marks the third consecutive time that the RBI has kept interest rates steady in the current financial year.

RBI Introduces 10% Incremental CRR to Manage Liquidity Impact After Rs 2,000 Note Withdrawal

Related Tags

  • cash reserve ratio
  • CRR
  • Incremental CRR
  • liquidity
  • RBI
  • RBI MPC policy
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