RBI Decides To Discontinue I-CRR In A Phased Manner

Relevance: GS3 - Indian Economy and issues relating to planning, mobilization, of resources, Growth and Development; Prelims

(Source: The Hindu, 09/09/2023)

Click here for Daily Current Affairs

Why in the news?

• Recently, the Reserve Bank of India (RBI) has announced the discontinuation of the incremental cash reserve ratio (I-CRR) in a phased manner.
• While 25% of the I-CRR was released on September 9, another 25% would be released on September 23 and the balance would be released on October 7.

What is I-CRR?

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

When was I-CRR introduced?

• The I-CRR (Incremental Cash Reserve Ratio) was introduced by the Reserve Bank of India (RBI) on August 10.
• Under this policy, banks were required to maintain a 10% reserve on the increase in their net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023.
  • NDTL is the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other banks.
• This policy came into effect from the fortnight starting August 12.
• The central bank had decided to keep the Cash Reserve Ratio (CRR) unchanged at 4.5%.

Why was I-CRR needed?

• The introduction of the I-CRR was a short-term strategy designed to counter the excess liquidity resulting from factors such as the reintroduction of ₹2,000 banknotes into the banking system, the substantial transfer of surplus funds to the government by the RBI, an increase in government expenditure, and a surge in capital inflows.

Earlier introduction of I-CRR

• In November 2016, the Reserve Bank of India (RBI) introduced the Incremental Cash Reserve Ratio (I-CRR) as a measure to absorb excess liquidity in the financial system. This move was in response to the demonetization of Rs 500 and Rs 1,000 banknotes on November 8, 2016.
• Under the I-CRR, banks were required to maintain a 100% reserve on the increase in their Net Demand and Time Liabilities (NDTL) between September 16, 2016, and November 11, 2016.
• However, the I-CRR was a temporary measure and was discontinued from the fortnight beginning December 10, 2016.

(*Click this link to read prelims specific weekly current affairs articles)

FAQs

MCQ

Question: When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean? (UPSC 2010)

(a) The commercial banks will have less money to lend

(b) The Reserve Bank of India have less money to lend

(c) The Union Government will have less money to lend

(d) The commercial banks will have more money to lend