Reserve Bank of India's MPC Decision: The Monetary Policy Committee (MPC) of the Reserve Bank of India has unanimously kept the policy repo rate unchanged at 6.5%.
Inflation Projection: The MPC raised the retail inflation projection for the current fiscal year by 30 basis points to 5.4% due to rising vegetable prices and potential El Niño weather conditions.
Withdrawal of Accommodation: The MPC, with a majority of 5 out of 6 members, aims to withdraw accommodation gradually to align inflation with the target while supporting economic growth.
GDP Growth Projection: The projection for real GDP growth in 2023-24 remains at 6.5%.
Liquidity Management: To address excess liquidity, the RBI will implement an incremental cash reserve ratio of 10% on the increase in banks' net demand and time liabilities between May 19, 2023, and July 28, 2023.
Temporary Measure: The cash reserve ratio adjustment is a temporary measure to manage liquidity, ensuring sufficient funds for the economy's credit needs.
Incremental CRR
The Reserve Bank of India (RBI) has decided to address the issue of excess liquidity in the banking system through a specific policy measure. This measure involves implementing an incremental cash reserve ratio (CRR) of 10%. The cash reserve ratio is the portion of a bank's deposits that it needs to keep with the central bank as a reserve requirement.
In this case, the RBI's action will focus on the increase in banks' net demand and time liabilities (NDTL) during a specified period, which is from May 19, 2023, to July 28, 2023. The net demand and time liabilities represent the total amount of funds that a bank owes to its customers.
By applying an incremental CRR on the increased NDTL, the RBI aims to absorb excess liquidity from the banking system. Excess liquidity can lead to various challenges, including potentially excessive credit growth and inflationary pressures. The incremental CRR essentially acts as a tool to manage liquidity in the economy and ensure that there is an appropriate balance between the availability of funds for lending and maintaining stable economic conditions.
It's important to note that this policy action is temporary and time-bound, intended to address the specific liquidity conditions during the mentioned period. The RBI's decision to implement this measure is part of its broader efforts to effectively manage monetary policy and maintain overall financial stability in the country.
