RBI decides to discontinue I-CRR

The Reserve Bank of India (RBI) has decided to discontinue the incremental Cash Reserve Ratio (I-CRR) in a phased manner.

• While 25% of the I-CRR maintained would be released on September 9, 2023, another 25% would be released on September 23, 2023, and the balance 50% would be released on October 7, 2023.
• Based on an assessment of current and evolving liquidity conditions, it has been decided that the amounts impounded under the I-CRR would be released in stages so that system liquidity is not subjected to sudden shocks and money markets function in an orderly manner.
• The RBI in its Monetary Policy Statement had announced that scheduled banks would be required to maintain an I-CRR of 10% scheduled banks  on the increase in their net demand and time liabilities (NDTL) till July 28, 2023.
• Need of such a step: The measure was intended to absorb the surplus liquidity generated by various factors, including the return of Rs. 2000 notes to the banking system.

What is Incremental Cash Reserve Ratio (I-CRR)?

• The I-CRR is an additional cash balance that the RBI can ask banks to maintain over and above the cash reserve ratio (CRR).
  
  

  CRR is the minimum amount of the total deposits that banks must keep with the central bank – for a specific period. anks are currently required to maintain 4.5 percent of their Net Demand and Time Liabilities as CRR with the RBI.

• Banks are required to maintain liquid cash amounting to a certain proportion of their deposits and certain other liabilities with the RBI.
• This is a tool at the disposal of the RBI to control the liquidity in the economy and can also act as a buffer in periods of bank stress.

Why did RBI take this step?

• RBI has the option to impose an incremental credit reserve ratio, in addition to the CRR, in periods of excess liquidity in the system and the central bank is now exercising it.
• However, these extra funds can be returned to the banks as per the requirement, but on the discretion of RBI.

What are the impacts of I-CRR?

• Less fund availability with banks for lending: The temporary increase in the Cash Reserve Ratio (CRR) means that banks will have to set aside more of their funds with the Reserve Bank of India (RBI).
• This could lead to a reduction in the funds available for lending and an increase in market interest rates.
  • Less lending for loans: This is because banks will be holding onto more of their resources rather than lending them out.
• Can control Inflation: This temporary increase in CRR is a measured approach to manage the excess liquidity caused by the recent demonetization of Rs.2,000 notes.

Tools of Open Market Operations (OMO):

Open Market Operations (OMO) are one of the conventional monetary policy tools used by central banks to regulate the money supply and interest rates in an economy. The main tools used in OMO are:

• Government Securities Purchase: Central banks buy government securities (such as bonds or treasury bills) from financial institutions or the general public. This injects money into the financial system, increasing the money supply.
• Government Securities Sale: Conversely, central banks can sell government securities to financial institutions or the public. This reduces the amount of money in circulation, thus decreasing the money supply.
• Repurchase Agreements (Repo): In a repo, the central bank sells government securities with an agreement to repurchase them later. It allows the central bank to control the money supply while maintaining ownership of the securities.
• Reverse Repurchase Agreements (Reverse Repo): This is the opposite of a repo. In a reverse repo, the central bank buys government securities with an agreement to sell them back in the future. This temporarily reduces the money supply, as it takes money out of circulation.
• Term Auction Facility (TAF): This helps in managing liquidity over a specified term.
• Marginal Standing Facility (MSF): The MSF allows banks to borrow funds overnight from the central bank against the collateral of government securities. The interest rate on MSF is higher than the repo rate, which discourages banks from excessively relying on this facility