The Reserve Bank of India on Saturday announced an incremental cash reserve ratio of 100% for the fortnight, in a bid to tackle the “excess liquidity in the system” arising from the return of the demonetised Rs 500 and Rs 1,000 notes. “The magnitude of surplus liquidity available with the banking system is expected to increase further in the fortnights ahead,” the RBI said in a circular. “In view of this, it has been decided to absorb a part of this surplus liquidity by applying an incremental CRR as a purely temporary measure.”
CRR is the minimum amount of cash banks must park compulsorily with the central bank without earning any interest. The RBI, however, clarified that the 100% CRR applies to incremental deposits made at banks between September 16 and November 11, and that the ratio on total banking deposits will remain unchanged at 4%.
“This is intended to absorb a part of the surplus liquidity arising from the return of [Rs 500 and Rs 1,000 notes] to the banking system, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy,” the RBI notification said. The central bank of India will review the decision on December 9, “or even earlier”.
There has been a surge in deposits made at banks since the government scrapped the high-denomination currency on November 8. The country has been grappling with a cash crunch, with the RBI and Centre’s repeated revision of rules to exchange the old notes.