INCREMEMENTAL CASH RESERVE RATIO (Syllabus: GS Paper 3 – Economy)

Context: The Reserve Bank of India has decided to discontinue the incremental Cash Reserve Ratio (I-CRR) in a phased manner.  The measure was intended to absorb the surplus liquidity generated by various factors, including the return of ₹2000 notes to the banking system. 

Incremental cash reserve ratio (ICRR)

• Cash reserve ratio (CRR): It is the share of a bank’s total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash.

o Limitations: The bank cannot use this amount for lending and investment purposes and does not get any interest from the RBI.

o Exclusion: CRR applies to scheduled commercial banks, while the regional rural banks and NBFCs are excluded.

o Present requirement: Currently, banks are required to uphold 4.5% of their Net Demand and Time Liabilities (NDTL) as CRR with the RBI.

• ICRR: Unlike CRR, which applies to the total deposit base, ICRR specifically targets new deposits.

o It is applied to the incremental increase in deposits made by customers within a certain period. It was introduced on August 10, 2023, as a temporary measure by RBI to absorb surplus liquidity.

Net Demand and Time Liabilities (NDTL): It is the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other bank.