The Reserve Bank of India (RBI) announced on September 8 that it plans to phase out the incremental cash reserve ratio (I-CRR) system.
In a press release, the central bank stated, “After careful review, it has been decided to gradually discontinue the I-CRR.”
Let’s understand what is incremental cash reserve ratio?
The term “incremental cash reserve” refers to an additional reserve requirement that a central bank, like Reserve Bank of India (RBI) impose on commercial banks. This requirement mandates that banks set aside a certain percentage of their deposits, over and above the regular cash reserve ratio (CRR), with the central bank.
The purpose of imposing an incremental cash reserve is typically to manage liquidity in the banking system. When banks are required to hold a higher percentage of their deposits as reserves, it reduces the amount of money available for lending and other investments. This can be a tool used by central banks to control inflation, stabilize financial markets, or address other monetary policy objectives.
It’s important to note that incremental cash reserve requirements are often considered temporary measures and can be adjusted by the central bank as economic conditions change. They are one of the tools that central banks have at their disposal to influence the money supply and manage the overall health of the financial system.
What RBI said?
The RBI explained that the amounts held under the I-CRR will be released in stages to prevent sudden shocks to system liquidity and to ensure the orderly functioning of money markets.
Previously, on August 10, the RBI had mandated banks to maintain a 10 percent incremental cash reserve ratio (ICRR) starting from August 12. This measure was part of the central bank’s strategy to reduce excess liquidity in the banking system after the discontinuation of the ₹2,000 currency note.
RBI Governor Das emphasized that the central bank had deemed the imposition of ICRR necessary to maintain financial and price stability, ensuring that banks would still have adequate liquidity for their lending activities.
He stated, “The incremental CRR was considered necessary in light of the liquidity surplus. We viewed it as a step in favor of financial and price stability, with potential effects on inflation. It is a temporary measure.”