The Reserve Bank of India may extend its prescription that requires banks to maintain incremental cash reserve ratio (I-CRR) on deposits for a few weeks as the current surplus liquidity in the banking system is not in keeping with its disinflationary monetary policy stance.

Per the RBI’s last (August 10) bi-monthly monetary policy review, the I-CRR will be reviewed on September 8or earlier, well ahead of the festival season.

Currently, the banking system has surplus liquidity of about ₹94,000 crore (as of September 6). Bank treasury experts estimate that if the government’s cash balances with RBI are taken into account, the overall system liquidity could well be around ₹2-lakh crore.

So, if I-CRR is reversed at this stage, the overall system liquidity will swell roughly by another ₹1-lakh crore.

Since surplus systemic liquidity is not in conformity with the monetary policy committee’s avowed stance of “withdrawal of accommodation with the objective of aligning inflation with the target of 4 per cent”, experts say the central bank is likely to persist with I-CRR for a few weeks or up to the next monetary policy review.

Surplus liquidity

The central bank on Thursday announced that it will absorb surplus liquidity amounting to ₹50,000 crore from the banking system via a 14-day variable rate reverse repo auction on “September 8”.

“Currently, the system liquidity is comfortable and call money rates are trading mostly below the repo rate. If RBI withdraws the I-CRR prescription, it will add about ₹1-lakh crore more liquidity to the system.

“The RBI would like to keep liquidity at the optimum level so that it does not fuel inflation. So, it may extend the I-CRR prescription for a few weeks,” said Gopal Tripathi, Head – Treasury & Capital Markets, Jana Small Finance Bank.

The operating framework of monetary policy aims at aligning the operating target – the weighted average call rate – with the policy repo rate (6.50 per cent). This is the rate at which RBI provides liquidity to banks and primary dealers against the collateral of government and other approved securities.

CARE Ratings, in a note, said despite the additional cash reserve ratio requirement imposed under I-CRR, systemic liquidity is projected to remain in a surplus state.

I-CRR prescription

In its last bi-monthly monetary policy review, RBI asked banks to maintain an I-CRR of 10 per cent (with effect from the fortnight beginning August 12) on the increase in their deposits between May 19and July 28. CRR is the slice of deposits banks have to keep with RBI.

This measure is intended to absorb the surplus liquidity generated by various factors, including the return of ₹2000 notes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows, RBI Governor Shaktikanta Das said in his August 10 statement.

He then emphasised that this is purely a temporary measure for managing the liquidity overhang.

“Even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy…The existing cash reserve ratio remains unchanged at 4.5 per cent,” he said.