RBI Needs To Calibrate Reversal Of I-CRR Amid Temporary High Inflation: Deutsche Bank

The Reserve Bank of India should calibrate the reversal of the incremental cash reserve ratio amid "high temporary inflation", Deutsche Bank said.

The RBI may retain the option of reversing it completely at a later stage if the system's liquidity were to tighten more than anticipated, according to a report authored by Kaushik Das and released on Tuesday.

"A calibrated step towards reversing the I-CRR may find justification, particularly in a period characterised by a temporary spike in CPI inflation," it said.

In August, the central bank mandated all scheduled banks to maintain an incremental CRR of 10% on the increase in their net demand and time liabilities. The measure is in place temporarily, and the RBI will review it on or before Sept. 8. The existing CRR was kept unchanged at 4.5%.

While the RBI may reverse the I-CRR completely on Sept. 8 or continue with it till Oct. 6, Das doesn't expect the measure to continue beyond the monetary policy meeting (on Oct. 6), based on Deutsche Bank's liquidity estimates for the second half of fiscal 2024.

"The banks can always avail liquidity from the RBI through the repo window if the liquidity situation tightens temporarily and/or until the time the RBI reverses the I-CRR completely in the second stage," the report said.

The RBI may continue with I-CRR till October to keep short-term rates higher than the repo rate by about 25–30 basis points till inflation "remains high, to generate an effective tightening in rates without hiking the repo rate".

"Once there is visible evidence of inflation moderating materially by September-end, then the RBI can reverse the I-CRR in the next monetary policy meeting, scheduled for October," it said.

The Way Ahead

The bank expects the RBI to hold on to rates for now but cut the CRR rate by 50 bps to 4% in February 2024, releasing about Rs 500 billion in liquidity in the system.

It expects the repo rate to be cut in April 2024. "Currently, we are forecasting a 100 bps of repo rate cut in 2024," it said.

Bunched-up state elections, festival-related demand, and Lok Sabha elections in 2024 will likely result in bigger currency-in-circulation leakage in the second half of fiscal 2024 as compared with the previous years.

The total CIC leakage is expected to be Rs 2.1 trillion in the current fiscal, with about Rs 3 trillion in the second half.

The leakage in the CIC may increase to Rs 1.3 trillion, representing 1.7% of the gross domestic product, from October to December, and Rs 1.7 trillion, or 2.1% of the GDP, from January to March 2024, it said.