At least six top treasury officials, the Reserve Bank of India (RBI) may require lenders to continue keeping additional cash reserves for two more fortnights with minor adjustments to the amount as it strives to maintain tight liquidity amid high inflation. Four of the officials stated that the incremental cash reserve ratio (I-CRR), which is currently 10%, may be lowered to 5%-8% gradually.
Withdrawing more than Rs 1 lakh crore ($12.04 billion) in liquidity between May 19 and July 28, the RBI requested banks to hold an I-CRR of 10% in August. A treasury chief at a state-run bank stated that the liquidity excess is roughly where it was when the decision was made. Therefore, withdrawal would be rather abrupt, and a calibrated reversal would be the optimum course of action.
Following a spike in retail inflation to 7.44% in July, RBI Deputy Governor Michael Patra warned that a liquidity overhang could endanger the outlook for inflation in the minutes of the Monetary Policy Committee meeting from last month. According to a senior treasury officer at a private bank, "The I-CRR is acting as an indirect rate hike and, at best, the RBI could lower the limit taking into account tax outflows."
In spite of rising government spending, the banking system's liquidity excess is currently over Rs 1.5 trillion, down from over Rs 2 trillion prior to the I-CRR decision. Short-term variable repo rate (VRR) auctions can be used to close any gap that arises later in the month as a result of tax outflows, according to Citi economists Samiran Chakraborty and Baqar M. Zaidi in a note.
They noted that the RBI can decide to lower the I-CRR to a lower level, such as 5%, in order to increase liquidity. I-CRR should be halted, according to at least two senior bank executives from significant state-run institutions, who anticipate that liquidity would naturally drain away in the next two weeks due to the dual tax outflows.
A top treasury officer at a sizable state-run bank stated, "The RBI would not like liquidity to go into deep deficit as call rates will shoot up sharply above the repo rate." Around September 15, advance tax payments are due, and September 20 is the deadline for Goods and Service Tax withdrawals. Traders predict total withdrawals of between Rs 2.2 lakh crore and Rs 2.5 lakh crore.
