India central bank to withdraw 1 trln rupees via incremental CRR
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The Reserve Bank of India (RBI) will withdraw nearly one trillion rupees ($12.07 billion) from the banking system through a temporary increase in the amount of funds lenders set aside with the central bank, as it tries to keep a lid on inflation.
Earlier in the day, India's Monetary Policy Committee kept key policy rates unchanged but RBI Governor Shaktikanta Das asked banks to hold an incremental cash reserve ratio (CRR) of 10% on increase in deposits between May 19 and July 28, with effect from the fortnight starting Aug. 12.
Liquidity surplus in India's banking system has averaged around 2.5 trillion rupees in August, up from 1.6 trillion rupees in July, pushing down overnight borrowing and lending rates.
Thursday's measure also intends to absorb liquidity added to the banking system due to a return of 2000-rupee denomination notes, Das said.
"Even after this temporary impounding, there will be adequate liquidity in the system to meet credit needs of the economy," Das said.
The RBI will review this measure before Sept. 8, ahead of the Indian festive season, when currency in circulation typically increases and banking liquidity declines, he said.
That implied banks would have to maintain additional CRR for the next two fortnights, ending Aug. 25 and Sept. 8.
Traders expect interbank call money rates, as well as the TREPS rate, at which non-bank borrowers raise overnight funds, to start rising from Monday, with nearly half of the surplus moving out.
"The immediate impact of RBI absorbing liquidity via incremental CRR will be a mild hardening of money market rates for borrowers," Madhavi Arora, an economist at Emkay Global said, adding banks will see a "slight impact" on lending margins."
The incremental CRR was imposed after banks stayed away from parking funds with the central bank using variable rate reverse repo (VRRR) auctions.
Auction for the 14-day variable rate reverse repo will continue to be the main liquidity management tool, Das said, adding that shorter duration VRRR auctions would be used for "fine-tuning."
