The Reserve Bank of India (RBI), as part of its monetary policy statement delivered by the Governor on 10 August 2023, mandated that scheduled banks maintain an Incremental Cash Reserve Ratio (I-CRR) of 10 per cent on the increase in their Net Demand and Time Liabilities (NDTL) between 19 May 2023 and 28 July 2023. The requirement, issued under Section 42(1A) of the RBI Act, 1934, became effective from the reporting fortnight beginning 12 August 2023.
Background
The I-CRR was introduced as a temporary liquidity management measure in response to the sharp increase in banking system liquidity following the RBI's decision to withdraw Rs 2000 denomination banknotes from circulation in May 2023. The withdrawal exercise resulted in a substantial volume of Rs 2000 notes being deposited into bank accounts, creating a liquidity surplus that had the potential to distort monetary policy transmission and fuel inflationary pressures.
The standard Cash Reserve Ratio (CRR), maintained at 4.5 per cent of NDTL, was deemed insufficient to absorb the incremental liquidity arising from the Rs 2000 note return. Rather than adjusting the permanent CRR rate — which would have had broader and more lasting monetary policy implications — the RBI opted for the targeted I-CRR mechanism applied specifically to the incremental NDTL during the identified period.
The monetary policy announcement kept the repo rate unchanged at 6.5 per cent, signalling that the I-CRR was a liquidity tool rather than a rate-based intervention.
Key Provisions
The I-CRR framework operated as follows:
Rate and base period: Scheduled banks were required to maintain an additional CRR of 10 per cent on the increase in their NDTL between the reporting fortnight ending 19 May 2023 and the reporting fortnight ending 28 July 2023.
Effective date: The requirement became operative from the reporting fortnight beginning 12 August 2023, giving banks minimal lead time for liquidity planning.
Temporary nature: The RBI explicitly characterised the I-CRR as a temporary measure, announcing that it would be reviewed on or before 8 September 2023 with a view to returning the impounded liquidity in a phased and calibrated manner.
Phased release: The RBI subsequently announced a phased discontinuation of the I-CRR in three tranches — releasing 25 per cent each on 9 September and 23 September 2023, and the final 50 per cent on 7 October 2023.
Non-remuneration: Consistent with CRR balances generally, the I-CRR balances did not earn any interest, effectively representing an opportunity cost for banks during the maintenance period.
Implications for Practitioners
For banking law practitioners, the I-CRR demonstrates the RBI's willingness to deploy unconventional, targeted liquidity tools outside the standard monetary policy framework. This has implications for how banks model regulatory capital requirements and manage treasury operations during periods of exceptional liquidity events.
Bank treasurers and ALM practitioners should note that the I-CRR impounded an estimated Rs 1.1 lakh crore from the banking system. For institutions with significant NDTL growth during the reference period, the I-CRR represented a material constraint on deployable funds, potentially affecting credit disbursement timelines and investment portfolio management.
Practitioners advising NBFCs should note that the I-CRR applied only to scheduled banks, not to non-banking financial companies. However, the downstream effects of reduced bank lending capacity may have indirectly impacted NBFC funding costs during the maintenance period.