Why is it in the news?

The Reserve Bank of India (RBI) has decided to discontinue the Incremental Cash Reserve Ratio (I-CRR) in a phased manner, with specific implications.

About I-CRR

• I-CRR was introduced on August 10, 2023, as a temporary measure by RBI.
• Its purpose was to absorb surplus liquidity in the banking system, arising from factors like the return of Rs 2,000 notes and increased government spending and capital inflows.

RBI’s Decision and Phased Discontinuation

• RBI reviewed the I-CRR and decided to discontinue it based on evolving liquidity conditions.
• The discontinuation will occur in stages to avoid sudden shocks to system liquidity and maintain orderly money markets.
• The phased release schedule is as follows:
• 25% of I-CRR funds to be released on September 9.
• Another 25% on September 23.
• The remaining 50% on October 7.

Impact on Liquidity Conditions

• I-CRR aimed to absorb over Rs 1 lakh crore of excess liquidity from the banking system.
• It briefly turned the banking system’s liquidity deficit but returned to surplus after its implementation.
• On September 8, RBI absorbed Rs 76,047 crore of surplus liquidity from the system.

Other Measures RBI adopts to Suck Excess Liquidity

• Reverse Repo Operations: The RBI can conduct reverse repo operations, where it absorbs excess liquidity from banks by offering them government securities in exchange for funds.
• Foreign Exchange Operations: Selling foreign exchange reserves can reduce liquidity in the domestic currency market.
• This approach can be used cautiously, as it can impact theexchange rate and international trade.
• Moral Suasion: The RBI can communicate with banks and financial institutions to encourage them to voluntarily manage their liquidity positions and curtail excessive lending.

Cash Reserve Ratio (CRR)

• CRR is the minimum amount of deposits that banks must maintain as cash reserves with the RBI.
• It serves to maintain the health of the banking system by ensuring a certain portion of deposits remains with the central bank.
• Currently, the CRR stands at 4.5%.