Currency withdrawal: RBI sets 100 per cent incremental CRR to manage liquidity

The central bank said it will review the decision on December 9

By: ENS Economic Bureau | Mumbai | Updated: November 29, 2016 9:09 am
DCCBs (District Co-operative Banks) The RBI said it will review the decision on December 9 or earlier as the incremental CRR is intended to be a temporary measure within RBI’s liquidity management framework to drain excess liquidity in the system.

The Reserve Bank of India has announced an incremental cash reserve ratio (CRR) of 100 per cent for banks for the fortnight beginning Sunday in order to tackle the surge in deposits following demonetisation of Rs 500 and Rs 1000 notes. “On the increase in NDTL (net demand and time liabilities) between September 16 and November 11, scheduled banks shall maintain an incremental CRR of 100 per cent, effective the fortnight beginning November 26, 2016,” the RBI said in a circular. CRR is the portion of deposits to be maintained with the RBI.

The RBI said it will review the decision on December 9 or earlier as the incremental CRR is intended to be a temporary measure within RBI’s liquidity management framework to drain excess liquidity in the system. The regular CRR would continue to be at 4 per cent. The excess liquidity is estimated to be around Rs 3 lakh crore. As per the RBI circular, the entire amount collected would have to be kept with the RBI as CRR.

After the withdrawal of the legal tender status of Rs 500 and Rs 1,000 denomination bank notes beginning November 9, 2016, there has been a surge in deposits relative to the expansion in bank credit, leading to large excess liquidity in the system, it said.The RBI also observed that the magnitude of surplus liquidity available with the banking system is expected to increase further in the fortnights ahead. “In view of this, it has been decided to absorb a part of this surplus liquidity by applying an incremental cash reserve ratio (CRR) as a purely temporary measure,” it said.

This is intended to absorb a part of the surplus liquidity arising from the return of now defunct Rs 500/1000 notes to the banking system, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy, it said.

The RBI has separately revived the Guarantee Scheme to enable deposit of Rs 500/1000 balances at the RBI or at currency chests and get immediate value, it said. This measure should also facilitate banks’ compliance with the incremental CRR, it added. In view of the problem of mounting deposits it has decided to revive the Guarantee Scheme wherein banks can deposit the notes directly with the offices of the RBI under whose jurisdiction they are located.

The notes will remain in the vaults of RBI, under the lock and key of the depositing banks till taken up for examination.

The RBI also said foreign citizens (i.e. foreign passport holders) can exchange foreign exchange for Indian currency notes up to a limit of Rs 5000 per week till December 15, 2016 subject to the tenderer submitting a self-declaration that this facility has not been availed of during the week. The authorised person should keep the passport details and the declaration on record