RBI Withdraws $12.07B to Curb Inflation, Indian Banks to Hold Incremental Cash Reserve Ratio


RBI Governor Announces Incremental Cash Reserve Ratio for Banks to Tackle Liquidity Surge

The Reserve Bank of India (RBI) is set to extract nearly $12.07 billion from the banking system through a temporary increase in funds held by lenders at the central bank. This move aims to control inflation as India’s Monetary Policy Committee maintains key policy rates.

RBI Governor Shaktikanta Das has urged banks to maintain an additional cash reserve ratio (CRR) of 10% for increased deposits between May 19 and July 28, effective from August 12.

August witnessed a liquidity surplus in India’s banking system, averaging around $2.5 billion, up from $1.6 billion in July. This surplus led to reduced overnight borrowing and lending rates.

The incremental CRR seeks to absorb added liquidity due to the return of 2000-rupee denomination notes.

Governor Das assured that despite this temporary measure. Sufficient liquidity will remain in the system to meet the economy’s credit demands. The RBI plans to review this strategy before September 8, aligning with the upcoming festive season. Which typically sees increased currency circulation and reduced banking liquidity.

Market participants anticipate rising interbank call money rates and the TREPS rate starting Monday, with approximately half of the surplus exiting the system. While the incremental CRR might lead to a mild tightening of money market rates for borrower. The overall impact on lending margins is expect to be slight.

Governor Das emphasized that the primary liquidity management tool remains the 14-day variable rate reverse repo auction, with shorter duration VRRR auctions for fine-tuning purposes.