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I-CRR Impact on Bond Yields



  Aug 26, 2023

Incremental Cash Reserve Ratio (I-CRR) and Bond Yields


The Incremental Cash Reserve Ratio (I-CRR) is a monetary policy tool used by the Reserve Bank of India (RBI) to manage liquidity in the banking system. The Cash Reserve Ratio (CRR) is the portion of a bank's deposits that it must maintain with the central bank in the form of cash reserves. This requirement helps the central bank regulate the money supply in the economy.
 
The I-CRR is an extension of the regular CRR, but it applies to the incremental increase in a bank's net demand and time liabilities (NDTL) within a specific period. NDTL refers to the total deposits held by a bank that are subject to reserve requirements.
 
When the RBI implements the I-CRR, banks are required to set aside a certain percentage of the increased deposits they have received over a specified time frame. This serves as an additional reserve requirement on top of the regular CRR.
 
The primary objective of implementing the I-CRR is to absorb excess liquidity from the banking system. When banks set aside a portion of their increased deposits as reserves, it reduces the amount of money available for lending or investment. This can help manage inflationary pressures and ensure financial stability by preventing an excessive expansion of credit.
 
The I-CRR can also impact short-term interest rates. As banks set aside more funds as reserves, they have less money to lend to each other in the interbank market. This can lead to higher short-term borrowing costs, affecting the overall cost of borrowing in the economy.
 
The RBI can use the I-CRR as a tool to fine-tune liquidity conditions and influence monetary policy. It can choose to adjust the I-CRR percentage based on its assessment of the economic situation and its objectives, such as controlling inflation or stabilizing financial markets.
 
Overall, the I-CRR is a mechanism that allows the central bank to manage liquidity and credit expansion more effectively by specifically targeting the increase in deposits held by banks over a defined period.


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