Mumbai: The Reserve Bank of India (RBI) will allow banks to use all their cash to meet the central bank’s new cash reserve ratio requirements, not just a certain amount of the money, in a technical but important move that could provide relief to the country’s banks.
The RBI on Saturday had ordered banks to put all the deposits they accumulated between mid-September and mid-November under the central bank’s cash reserve ratio. The banks had been flooded with deposits after the government banned larger bank notes.
That created problems for banks. Under India’s complicated rules for cash holdings, only a certain amount of the cash they hold in their vaults is eligible to be placed under cash reserve requirements.
Those issues should now be resolved. The RBI in a statement on Wednesday widened the criteria for cash that can be included, including all the Rs500 and Rs1,000 banknotes the government abolished this month.
“In the wake of deposits of specified bank notes in massive quantity and accumulations thereof, the above instructions have been revisited," the RBI said.
The move triggered a big rally in banking shares as well as bonds.
Investors had worried that banks would have to scramble to get the cash required to place with the RBI under the more stringent cash reserve ratio requirements.
The 10-year benchmark bond’s yield fell 8 basis points to 6.24% on Wednesday, erasing almost all the losses on Monday after the RBI’s announcement. The yield rose as much as 15 bps to 6.34% then.
The RBI said it will review the decision in the second half of February. Reuters