INCREMENTAL CRR AFTER ₹2000 WITHDRAWAL Flashcards
What was the primary reason behind the introduction of the Incremental Cash Reserve Ratio (i-CRR)?
The i-CRR was introduced to manage the “liquidity overhang” caused by a significant influx of Rs. 2000 banknotes being deposited into banks after their withdrawal from circulation.
Explain the mechanism of the Incremental Cash Reserve Ratio (i-CRR).
The i-CRR required banks to maintain an additional 10% reserve on all new deposits received between May 19, 2023, and July 28, 2023. This was on top of the existing Cash Reserve Ratio (CRR) of 4.5%.
What is the key difference between the standard Cash Reserve Ratio (CRR) and the Incremental Cash Reserve Ratio (i-CRR)?
The standard CRR is a percentage of a bank’s total net demand and time liabilities (NDTL). The i-CRR was specifically applied to the increase in deposits that occurred after the withdrawal of Rs. 2000 notes.
Why did the RBI choose not to pay interest on deposits held under the i-CRR?
The i-CRR was a temporary measure to absorb excess liquidity. Paying interest would have defeated that purpose, as it would have added to the liquidity in the system.
What is the broader purpose of the i-CRR within the RBI’s economic toolkit?
The i-CRR is a tool used to manage the money supply in the economy. By reducing excess liquidity, the RBI aims to control inflation and ensure financial stability.
What does the term “liquidity overhang” refer to?
Liquidity overhang describes a situation where there is an excessive amount of money in circulation within the economy. This can lead to potential issues like inflation.
Why was the i-CRR considered a temporary measure?
The i-CRR was designed to address the specific and immediate issue of excess liquidity caused by the withdrawal of Rs. 2000 notes. Once the situation normalized, the need for the i-CRR diminished.
What are some potential consequences of leaving a “liquidity overhang” unaddressed?
An unaddressed liquidity overhang could lead to:
Inflation: Excess money chasing goods and services can drive prices up.
Asset Bubbles: Easy access to money can fuel speculation and the creation of unsustainable asset prices.
Reduced effectiveness of monetary policy: The central bank may find it harder to control interest rates and influence economic activity.
What does the figure “87%” represent in the context of Rs. 2000 note withdrawal?
The figure “87%” indicates that a large portion (87%) of the withdrawn Rs. 2000 notes were not exchanged for other currency denominations, but rather deposited into bank accounts.
Besides i-CRR, what are some other tools the RBI can use to manage liquidity in the economy?
The RBI has various tools at its disposal, including:
Repo Rate: The rate at which the RBI lends to banks, influencing overall interest rates.
Open Market Operations: Buying or selling government securities to inject or withdraw liquidity.
Statutory Liquidity Ratio (SLR): The percentage of deposits banks must maintain in government securities.
