Incremental Cash Reserve Ratio (ICRR) and its impact
Recently the Reserve Bank of India (RBI) has asked banks to maintain an Incremental Cash Reserve Ratio (ICRR) of 10% on the increase in their deposits between May 19 and July 28.
What is ICRR?
- Before reading further on Incremental Cash Reserve Ratio (ICRR), we must first understand Cash Reserve Ratio (CRR).
- Banks have to keep liquid cash with the RBI equal to a certain proportion of their deposits and some other liabilities.
- It is a weapon available with the RBI to control cash in the economy and can also act as a buffer in periods of bank stress.
- At present, banks are required to maintain 4.5 per cent of their Net Demand and Time Liabilities (NDTL) as CRR with the RBI.
- RBI has the option of applying ICRR in addition to CRR in periods of excess cash in the system and the central bank is now exercising it. This means that banks will now have to deposit more liquid cash with the RBI.
- The RBI in its monetary policy has said that from August 12, 2023, all scheduled banks will have to maintain an additional cash reserve ratio equal to 10 per cent of the increase in their NDTL between May 19, 2023 and July 28, 2023.
- The RBI had announced the demonetisation of Rs 2,000 notes, due to which enough cash has accumulated in the banks. RBI intends to absorb some of this excess cash from the system. The main objective of RBI behind this move is to control inflation through this measure.
- As liquidity runs out, banks will have less money to lend, which will reduce demand for goods and services, which will in turn lower prices.
- A decrease in the money supply in the economy can lead to higher short-term interest rates. This is another measure to reduce inflation.
Inflation:
- Inflation When there is an imbalance between demand and supply, the prices of goods and services rise. This rise in prices is called inflation.
- Excessive inflation is harmful for the economy, whereas an inflation rate of 2 to 3% is good for the economy.
- Inflation is mainly caused by two factors, the demand factor and the price rise factor. Inflation leads to recession in some sectors of the economy.
- Inflation is measured in three ways: – Wholesale Price Index, Consumer Price Index and National Income Deviation Method.
Source – The Hindu
