The incremental cash reserve ratio introduced by the Reserve Bank of India on Aug. 12 is set for review on Friday. The central bank is likely to make an announcement on whether the provision should be discontinued or retained. If the I-CRR is retained, the market will also watch to see what form it takes.
The I-CRR consisted of 10% of the incremental net demand and time liabilities that banks collected between May 19 and July 28. This means that banks would have to set aside 10% of any incremental deposits collected between those two dates for no additional interest. One of the objectives behind this move was to remove excess liquidity in the system due to the deposit of Rs 2,000 currency notes after the RBI withdrew them from circulation.
Analysts believe that the RBI may continue with the I-CRR as system liquidity continues to remain in surplus. However, the quantum of the I-CRR may undergo a change, with the central bank choosing to reverse the I-CRR partially now and fully on October 6. India's monetary policy committee is set to meet between Oct. 4 and 6 for the next rate decision.
"We think a calibrated reversal of I-CRR may make sense in the current environment of temporary high inflation, with the RBI retaining the option of reversing it completely at a later stage if the system liquidity were to tighten more than anticipated," said Kaushik Das, chief economist, India & South Asia, Deutsche Bank.
While liquidity conditions are set to tighten temporarily in September owing to advance tax outgo related to direct taxes and goods and services taxes, they will ease again in October as the government steps up spending. By maintaining the I-CRR at lower levels, the RBI could achieve its objective of raising short-term borrowing rates for a few more weeks without announcing a rate hike.
The central bank, on Thursday, also announced a variable rate reverse repo auction of Rs 50,000 crore to mop up excess liquidity.
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