The reserve bank has decided to discontinue the Incremental Cash reserve ratio in a phased manner.
The measure was intended to absorb surplus liquidity generated by various factors, including the return of 2000 rupees noted to the banking system.
The term "Incremental Cash Reserve Ratio" (CRR) typically refers to a monetary policy tool used by central banks to regulate the amount of cash that commercial banks are required to hold as reserves. CRR is one of the ways central banks control the money supply and manage inflation.
Here's how the Incremental CRR works:
- Cash Reserves: Commercial banks are required to hold a certain percentage of their deposits as reserves with the central bank. This percentage is known as the Cash Reserve Ratio (CRR). The CRR is a fixed percentage of the bank's total deposits.
- Incremental CRR: The Incremental Cash Reserve Ratio is an additional requirement imposed by the central bank on the incremental increase in a bank's deposit base. In other words, it applies to the net increase in a bank's deposits over a specified period.
- Purpose: The central bank may use the Incremental CRR as a monetary policy tool to manage liquidity in the banking system. When the central bank wants to reduce the excess liquidity in the banking system, it can raise the Incremental CRR. This encourages banks to hold a higher portion of their incremental deposits as reserves with the central bank, reducing the funds available for lending.
- Impact: An increase in the Incremental CRR reduces the funds available for lending by commercial banks. As a result, it can lead to higher interest rates in the market and a slowdown in credit growth, which can help control inflation and stabilize the financial system.
- Implementation: The central bank typically communicates changes in the Incremental CRR to commercial banks through its monetary policy announcements. Banks are required to comply with these directives and adjust their reserve holdings accordingly.
It's important to note that the specific details of how Incremental CRR is implemented, including the percentage, frequency of changes, and the period over which it applies, can vary from one central bank to another and may change over time based on the central bank's monetary policy goals and the prevailing economic conditions. Therefore, the impact and effectiveness of Incremental CRR as a policy tool can vary depending on these factors.