Surplus liquidity continues ahead of RBI’s incremental CRR review

Banks continue to park their excess liquidity with the Reserve Bank of India (RBI), indicating that the banking system is flush with funds, ahead of the central bank’s review whether to continue with the additional cash reserve ratio mandate that came into effect from August 12.

To suck out the excess liquidity, the RBI will conduct a 14-day variable rate reverse repo auction (VRRR) of Rs 50,000 crore on Friday.

During the August review of the monetary policy, the RBI mandated all scheduled banks to maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19 and July 28 with effect from August 12.

“With respect to I-CRR, this was considered necessary in the background of liquidity overhang,” RBI Governor Shaktikanta Das had said.

The RBI had said it would review the I-CRR decision on or before September 8.

On Wednesday, banks parked Rs 93,935 crore of excess funds with the RBI. On Monday and Tuesday, they had parked over Rs 1.5 trillion.

Bank treasury officials said the RBI might continue with the I-CRR norms for some more time and would withdraw them only in phases.

“The market believes that I-CRR will stick at least till the end of September. It seems practical that they withdraw it in a phased manner. They might reduce it to 8 per cent, then 5 per cent,” a dealer at a state-owned bank said.

Liquidity went into deficit for the first time in the current financial year after the I-CRR norms kicked in, albeit for a few days in August. On August 21, the RBI infused Rs 23,644 crore — the highest amount of deficit since the I-CRR mandate. During that period, overnight rates also jumped to 6.76 per cent, which is above the repo rate of 6.5 per cent, and also marginally above the marginal standing facility rate of 6.75 per cent.

While overnight rates have softened since then, they closed higher on Thursday as compared to Wednesday. The weighted average call money rate was 6.4 per cent as compared to 6.33 per cent on Tuesday.