RBI’s temp measure to absorb surplus liquidity caused by ₹2,000 note inflows

• RBI increased the incremental cash reserve ratio (ICRR) for the increase in net demand and time liabilities (NDTL) between May 19-July 28.
• The measure intends to absorb surplus liquidity generated return of ₹2,000 notes to the system & more.
• Das assured that even after this ‘temporary impounding’, there will be adequate liquidity to meet the credit needs of the economy.

The Reserve Bank of India (RBI) on Thursday said that scheduled banks shall maintain an incremental cash reserve ratio (I-CRR) of 10%. This ‘temporary measure’ which comes into effect on the fortnight starting August 12, refers to the increase in net demand and time liabilities (NDTL) between May 19 to July 28.

“This measure is intended to absorb the surplus liquidity generated by various factors referred to earlier including the return of ₹2000 notes to the banking system. This is purely a temporary measure for managing the liquidity overhang,” RBI governor Shaktikanta Das said in his speech announcing the monetary policy committee (MPC) decision to keep base interest rates unchanged at 6.5%.

The RBI withdrew ₹2,000 currency notes from circulation on May 19, and gave people time till September 30 to deposit them with the banks.

“RBI has taken liquidity measures to drain out the incremental liquidity (mainly on account of deposits of ₹2,000 notes) to anchor the overnight rates towards policy rates,” said Gurvinder Singh Wasan, senior fund manager and Credit Analyst, JM Financial Asset Management.

Das assured that even after this ‘temporary impounding’, there will be adequate liquidity in the system to meet the credit needs of the economy. The ICRR will be reviewed on September 8, 2023 or earlier — with a view to returning the impounded funds to the banking system ahead of the festival season, he added.

The existing cash reserve ratio (CRR) remains unchanged at 4.5%.

“Excessive liquidity can pose risks to price stability and also to financial stability. Hence, efficient liquidity management requires continuous assessment of the level of surplus liquidity so that additional measures are taken as and when necessary to impound the element of excess liquidity,” he added.

RBI’s MPC however raised its inflation projections for FY24 to 5.4%, assured that the Indian economy has maintained its resilience with good domestic demand.

"Excess liquidity due to ₹2,000 notes, RBI dividend and capital flows might fuel Inflation. Hence incremental deposits CRR has been increased by 10 percent. This will absorb excess liquidity. This is a temporary measure,” said Marzban Irani, CIO debt at LIC MF.

‘Vulnerabilities creep in during good times’

Macro stress tests indicate that scheduled commercial banks (SCBs) would be able to comply with the minimum capital requirements even under severe stress scenarios. Yet, there is no room for complacency because vulnerabilities may creep in during good and tranquil times. “Buffers are best built up during these periods,” Das said.

Maintaining a stable financial system is a shared responsibility of banks and NBFCs as well as the RBI, Das said.

“On its part, the Reserve Bank remains steadfast in its commitment to safeguard the financial system from the emerging and potential challenges. We expect the same from the regulated entities also,” he added.