RBI Phases Out Incremental Cash Reserve Ratio: How Will It Impact Deposits And Loans?

The Reserve Bank of India (RBI) announced the discontinuation of the Incremental Cash Reserve Ratio (I-CRR) on September 8. “On a review, it has been decided to discontinue the I-CRR in a phased manner,” the central bank said in a press release.

To understand what ICRR is and how it is different from the cash reserve ratio (CRR), read here.

RBI plans to discontinue I-CRR in a phased manner to manage system liquidity without disrupting the money markets. On September 9, it will release 25 per cent of I-CRR, another 25 per cent on September 23, 2023, and the remaining 50 per cent on October 7, 2023.

I-CRR, introduced on August 12, mandated banks to keep a 10 per cent incremental cash reserve ratio as part of RBI’s strategy to absorb excess liquidity from the banking system following the withdrawal of the Rs 2,000 currency notes.

What It Means for You

Manoranjan Sharma, chief economist at Infomerics Ratings, believes that RBI's phased approach to discontinuing I-CRR is a prudent move. “Now that surplus liquidity has dissipated and the festival October-December season is on, this is welcome, particularly because historically, liquidity gets squeezed in October-December," he said.

“In the short and medium-term, this decision will not impact the rate of interest on deposits significantly because liquidity conditions, asset-liability mismatches, credit deployment opportunities, balance-sheet size and its composition are major factors influencing deposit interest rates in the deregulated commercial banking environment. However, its long-term impact is uncertain,” he added.

Sharma adds, “This decision is likely to benefit borrowers because loan pricing may not rise. In India’s commercial banking system, there is often an asymmetry in the pricing of deposits and loans. During liquidity shortages historically, loan rates tend to rise rapidly, whereas it is not always so the other way round.”

Says Biju E Punnachalil, chief risk officer of South Indian Bank, “RBI has multiple tools to suck out liquidity. One day before the review of ICRR, RBI had announced a 14-day Term Variable Rate Reverse Repo Auction with a notified amount of up to Rs. 50,000 crores, which implied the phasing out of ICRR. The auction was conducted on September 8, and Rs 18,670 crores was

accepted at 6.49 per cent. As we are nearing the advance tax payment date and festival season, a more elastic way of sucking out excess liquidity is a better option. Also, banks will earn a return on the funds placed with RBI under Term Reverse Repo, unlike zero return ICRR. Since it is margin-positive for banks compared to ICRR, it will be good for both depositors and borrowers. We can expect more such Term Reverse Repo Auctions in the coming fortnights, based on the system liquidity levels.”