RBI decides to discontinue I-CRR in a phased manner

Source: The post is based on the article “RBI decides to discontinue I-CRR in a phased manner” published in The Hindu on 9th September 2023

What is the News?

The Reserve Bank of India (RBI) has announced that it would discontinue the incremental cash reserve ratio (I-CRR) in a phased manner. 

What is the Incremental cash reserve ratio (I-CRR)?

I-CRR is an additional cash balance which the RBI can ask banks to maintain over and above the Cash Reserve Ratio(CRR).

Note: Cash Reserve Ratio (CRR) is the minimum amount of the total deposits which banks have to maintain as cash reserves with the Reserve Bank of India.It is an essential tool to maintain the health of the banking system.Banks cannot use this amount for lending or for any investment purposes.

Why was Incremental cash reserve ratio (I-CRR) introduced?

The I-CRR was introduced on August 10, 2023 by RBI.

I-CRR was announced as a temporary measure to absorb excess liquidity from the banking system. 

The level of surplus liquidity in the system surged because of the return of Rs 2,000 banknotes to the banking system.

RBI’s surplus transfer to the government also led to increase in government spending and capital inflows.

Note: Last time, RBI imposed the I-CRR was in November 2016 to absorb a part of the surplus liquidity in the system following the demonetization of Rs 500 and Rs 1,000 banknotes on November 8, 2016.It was later discontinued from the fortnight beginning December 10, 2016.