Global: India’s Central Bank Initiates 1 Trillion Rupees Withdrawal via Incremental CRR

The Reserve Bank of India (RBI) is set to withdraw nearly one trillion rupees ($12.07 billion) from the banking system using a temporary surge in the funds that banks hold with the central bank, aiming to control inflation.

In a recent announcement, the Monetary Policy Committee of India decided to keep key policy rates unchanged. However, RBI Governor Shaktikanta Das called on banks to maintain an incremental cash reserve ratio (CRR) of 10% on increased deposits between May 19 and July 28. This directive will take effect from the fortnight starting August 12.

The banking system in India has experienced a liquidity surplus, averaging around 2.5 trillion rupees in August, up from 1.6 trillion rupees in July. This surplus has led to lower overnight borrowing and lending rates.

Das clarified that this move aims to absorb the liquidity injected into the banking system due to the return of 2000-rupee denomination notes. He assured that even after this temporary measure, there will be sufficient liquidity to meet the economy’s credit requirements.

The RBI plans to review this measure before September 8, anticipating the upcoming Indian festive season, during which currency in circulation tends to rise while banking liquidity diminishes.

This implies that banks will need to maintain an additional CRR for the next two fortnights, ending on August 25 and September 8.

Market experts predict that interbank call money rates, along with the TREPS rate used by non-bank borrowers for overnight funds, will likely increase starting from Monday, with approximately half of the surplus exiting the system.

Madhavi Arora, an economist at Emkay Global, commented on the immediate consequences of RBI’s liquidity absorption through incremental CRR. She noted that it would cause a minor tightening of money market rates for borrowers and might slightly impact lending margins for banks.

The decision to impose incremental CRR was prompted by banks refraining from parking funds with the central bank through variable rate reverse repo (VRRR) auctions.

While Das confirmed that the 14-day variable rate reverse repo auctions will continue to be the primary liquidity management tool, he mentioned that shorter-duration VRRR auctions would be used for precise adjustments.