CRR hike necessary to absorb excess cash

Amid apprehensions that a hike in cash deposit ratio (CRR) by the Reserve Bank of India to 100% may restrict banks’ ability to lend to people and business, the government on Monday said the step was needed to absorb excess cash from the lenders.

“Increase in CRR is a part of the liquidity management strategy used by the RBI. Perhaps it has become necessary in the context of excess liquidity in the system. As you know excess liquidity adds to the volatility in the currency market,” Economic Affairs Secretary Shaktikanta Das told reporters here.

Banks are sloshing with cash in the wake of a lot of deposits from people of the banned Rs 500 and Rs 1,000 notes.

He said the RBI has already given a proposal for increasing the Market Stabilisation Scheme (MSS) limit that is under consideration of the government”.

 MSS, a tool to manage liquidity, has been fixed at Rs 30,000 crore for the current fiscal.

He said one thing “to be noted” is that bond yields and G-Sec rates in India were going down when almost in all other emerging markets the bond yields were going up in line with the US treasury bills and US bond rates. “It is merely happening because of excessive liquidity that we have in the system. When the bond yields go down naturally there is tendency on the part of the people to take the money out into high yielding areas specially US that offers higher yields,” Das said.

Therefore, its impact was also being felt in the currency market and some quantum of outflow of FII and other investments could not have been ruled out, he said. “To sum up I would say the next step which had become necessary in the context of excessive liquidity, it had become necessary to arrest the possible increase in volatility in the currency market,” he added.

The Reserve Bank on Saturday asked lenders to temporarily maintain an incremental CRR of 100% to absorb excess liquidity from the system. CRR is the portion of the deposits which banks are required to park with the RBI. The actual current rate of CRR is 4%.

Crisil says forget rate cuts by banks
The RBI’s latest move to soak up the entire surplus liquidity between September 16 and November 11 through incremental cash reserve ratio (CRR) will lead to over Rs 3 trillion outflow from banks and is likely to impact interest rate transmission, cautions a report.

Over the weekend, RBI had asked banks to set aside 100% of the deposits between September 16 (weeks before the end of the income disclosure scheme) and November 11 (three days after the currency delegalisation was announced) as incremental cash reserve ratio balance with it.)