Rbi Introduces Incremental Crr As A Temporary Measure To Absorb Surplus Liquidity

By Author: FundzBazar
Total Articles: 3
Comment this article

In an attempt to absorb some of the surplus liquidity available in the banking system, the Reserve Bank of India (RBI) on Saturday asked banks to maintain an incremental cash reserve ratio (CRR) of 100%, effective the fortnight ended November 26.

The move is estimated to absorb around Rs 3.24 lakh crore excess liquidity from the system and will be applicable on deposits between September 16 and November 11 fortnights.

This incremental CRR will be over-and-above the normal 4%.

This is a temporary measure and will be reviewed on 9th December 2016.

3 Reasons why RBI introduced Incremental CRR

Source: 3 reasons why the RBI hiked CRR, Business Standard, November 28, 2016

The surplus in the banking system at Rs 5 trillion (Rs 5-lakh crore) was inching closer to the maximum absorption capacity of the central bank. RBI had Rs 7.5 trillion (Rs 7.5-lakh crore) of g-secs prior to demonetisation drive, which act as collateral to absorb banking system surplus through the reverse repo window.
The process of putting in place other liquidity absorption measures like issuance of Market Stabilization ...
... Scheme (MSS) bonds was taking time. Issuance limit of MSS bonds for this year was set at Rs 300 billion earlier, which was too small given the liquidity absorption requirement.
The strong action could also be aimed at signaling RBI’s reluctance on market interest rates falling too sharply, too soon in the present global context.
Implications of incremental CRR:

Till now, banks have been parking the excess money with RBI through ‘reverse repo’ and earning interest.
But now, banks have to park this Rs. 3 Lakh Crore in CRR. And CRR earns no interest.
So, banks might reduce deposit rates going further as they have to pay interest in deposits while they don’t receive interest on CRR.

Short end of yield curve will be impacted immediately.
Yields will rise in the short term but will fall again as this is a temporary move.
The impact of this move can be seen in 10 year G-sec yield movement on 28th Nov 2016. Today, 10 year G-sec yield after opening at 6.3769%, hit 6.2838% level and is trading at around 6.3296% (12:35 PM).
The next Credit Policy Review of RBI is scheduled on 6th & 7th Dec 2016. Bond market is expecting a rate cut of more than 50 bps (0.50%) from RBI