The Hindu : Business : Cash reserve ratio hike: RBI move to reduce liquidity

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Sunday, Sep 12, 2004

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Cash reserve ratio hike: RBI move to reduce liquidity

By Our Special Correspondent

MUMBAI, SEPT. 11. The Reserve Bank of India decided to increase the cash reserve ratio (CRR) for banks in two stages with effect from fortnight beginning September 18. In the initial stage, the CRR would be raised from 4.5 per cent to 4.75 and in the second stage, the fortnight beginning October 2, it would be raised to 5 per cent. The CRR is the portion of deposit of banks which has to be compulsorily maintained with the RBI. This move is expected to suck out around Rs. 7,000 crores from the system.

"On a review of current liquidity conditions, it has been decided to increase the CRR of scheduled commercial banks, regional rural banks (RRBs), scheduled state co-operative banks and scheduled primary (urban) co-operative banks by one-half of one percentage point of their net demand and time liabilities (NDTL) in two stages, effective from fortnight beginning September 18," the RBI stated in a release here today.

Further, with effect from the fortnight beginning September 18, banks will be paid interest at the rate of 3.5 per cent per annum on their eligible cash balances maintained with the RBI under the CRR requirement against the current practice of payment of interest at the Bank Rate (6 per cent). The payment of interest on monthly basis will continue as at present.

"These measures are consistent with the present stance of monetary policy to meet credit growth and to support investment and export demand, given the current liquidity conditions. As indicated in the annual monetary and credit policy Statement of 2002-03, the RBI will continue to pursue its medium-term objective of reducing CRR to its statutory minimum of 3 per cent, while retaining the option to use the CRR in both directions for liquidity management, as and when essential, in addition to other instruments", the RBI added.

As regards remuneration of eligible cash balances under CRR, the Internal Group on Liquidity Adjustment Facility in December 2003 had recommended that "with substantial scaling down of CRR coupled with marked decline in overall interest rate structure in the economy and increasing liquidity needs of participants in the wake of higher interlinkages among different segments of the market, the degree to which CRR had been impacting banks as an implicit taxation earlier is considerably less in recent period. Accordingly, the remuneration of eligible cash balances at the Bank Rate is no longer justifiable and the remuneration of CRR, if any, be delinked from the Bank Rate and placed at a rate lower than the repo rate".

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