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RBI Announces Measures to Manage Liquidity Conditions (Requirement for Maintaining Additional CRR)

A. RBI Announces Measures to Manage Liquidity Conditions

With the withdrawal of the legal tender status of Rs. 500 and Rs. 1,000 denomination bank notes (hereafter referred to as Specified Bank Notes - SBNs) beginning November 9, 2016, there has been a surge in deposits relative to the expansion in bank credit, leading to large excess liquidity in the system. The magnitude of surplus liquidity available with the banking system is expected to increase further in the fortnights ahead. In view of this, it has been decided to absorb a part of this surplus liquidity by applying an incremental cash reserve ratio (CRR) as a purely temporary measure, as under:

a. The CRR remains unchanged at 4 per cent of outstanding net demand and time liabilities (NDTL);

b. On the increase in NDTL between September 16, 2016 and November 11, 2016, scheduled banks shall maintain an incremental CRR of 100 per cent, effective the fortnight beginning November 26, 2016.

This is intended to absorb a part of the surplus liquidity arising from the return of SBNs to the banking system, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy. As the incremental CRR is intended to be a temporary measure within the Reserve Bank’s liquidity management framework to drain excess liquidity in the system, it shall be reviewed on December 9, 2016 or even earlier.

c. The Reserve Bank has separately revived the Guarantee Scheme to enable deposit of SBN balances at the Reserve Bank or at currency chests and get immediate value. This measure should also facilitate banks’ compliance with the incremental CRR.


B. Reserve Bank of India Act, 1934 – Section 42(1A) Requirement for maintaining additional CRR

1. Under section 42(1) of Reserve Bank of India Act, 1934, all Scheduled Banks are required to maintain with Reserve Bank of India a Cash Reserve Ratio (CRR) of 4% of Net Demand and Time Liabilities (NDTL).

2. On a review of the current liquidity conditions after the withdrawal of legal tender status of Rs. 500/- and Rs. 1000/- denominations of bank notes issued by the Reserve Bank of India till November 8, 2016 (referred to as Specified Bank Notes), it has been decided to issue a directive under section 42(1A) of the Reserve Bank of India Act, 1934 requiring all Scheduled Commercial Banks/ Regional Rural Banks / all Scheduled Primary (Urban) Co-operative Banks / all Scheduled State Co-operative Banks to maintain with the Reserve Bank of India, effective from the fortnight beginning November 26, 2016 an incremental CRR of 100 per cent on the increase in NDTL between September 16, 2016 and November 11, 2016. As the incremental CRR is a temporary measure, it shall be reviewed on December 9, 2016 or even earlier.

3. A copy of the relative notification DBR.No.Ret.BC.40/12.01.001/2016-17 dated November 26, 2016 is as under.


C. RBI Notification - DBR.No.Ret.BC.40/12.01.001/2016-17 Date: November 26, 2016

In exercise of the powers conferred by sub-section (1A) of Section 42 of the Reserve Bank of India Act, 1934, the Reserve Bank of India hereby directs that all Scheduled Commercial Banks/ Regional Rural Banks / all Scheduled Primary (Urban) Co-operative Banks / all Scheduled State Co-operative Banks, shall maintain with the Reserve Bank of India, with effect from fortnight beginning November 26, 2016.

(i) an additional average daily balance over and above the average daily balance required to be maintained under sub-section (1) of Section 42; and

(ii) that the amount of such additional average daily balance shall not be less than 100 per cent of the increase in net demand and time liabilities between September 16, 2016 and November 11, 2016.
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