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Business News/ Markets / Stock Markets/  RBI Policy: Incremental CRR spooks banking stocks; here is how it will impact banks - explained
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RBI Policy: Incremental CRR spooks banking stocks; here is how it will impact banks - explained

Liquidity surplus in the banking system has averaged around ₹2.5 lakh crore in August, up from ₹1.6 lakh crore in July, pushing down overnight borrowing and lending rates.

The ICRR will be reviewed on September 8, 2023 or earlier with a view to returning the impounded funds to the banking system ahead of the festival season. (Image: ANI)Premium
The ICRR will be reviewed on September 8, 2023 or earlier with a view to returning the impounded funds to the banking system ahead of the festival season. (Image: ANI)

The Reserve Bank of India Governor Shaktikanta Das in his monetary policy statement on Thursday announced that all scheduled banks will have to maintain a 10% incremental cash reserve ratio (ICRR) from August 12.

The ICRR of 10% will be on the increase in the banks’ net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023.

“This measure is intended to absorb the surplus liquidity generated by various factors including the return of 2,000 notes to the banking system," Governor Das said, reiterating that it was purely a “temporary measure for managing the liquidity overhang".

Liquidity surplus in the banking system has averaged around 2.5 lakh crore in August, up from 1.6 lakh crore in July, pushing down overnight borrowing and lending rates.

The ICRR will be reviewed on September 8, 2023 or earlier with a view to returning the impounded funds to the banking system ahead of the festival season.

Also Read: RBI Policy Meeting Highlights: RBI Governor Shaktikanta Das delivers ‘hawkish pause’; remains cautious on inflation

On May 19, the RBI had announced the withdrawal of the 2,000 note from circulation and allowed citizens to exchange or deposit the notes in their accounts. By July 31, 3.14 lakh crore worth of 2,000 banknotes, or 88% in circulation, had returned to the banking system, as per RBI.

The ICRR is a temporary measure aimed at sucking the excess liquidity from the banking system. 

The net impact of the incremental CRR, as per RBI’s internal calculation, will be a little over 1 lakh crore, Governor Das said while addressing media in his post-policy conference.

"The Incremental CRR was the best option at the current juncture, but it was not the only tool available to us to deal with the liquidity overhang… The ICRR was considered necessary in the background of the liquidity overhang. We considered it desirable in interest of financial and price stability. It will have an impact on inflation also. It is a purely temporary measure," Das said.

Also Read: RBI MPC Meeting: Growth resilient but inflation remains a risk; key takeaways from RBI policy decision

Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank said while the ICRR decision is to be reviewed in September and could be a temporary decision, but if inflation pressures linger on, the possibility of continued durable liquidity tightening is likely.

Madhavi Arora, Lead Economist, Emkay Global Financial Services said the imposition of ICRR would imply a temporary liquidity depletion of around 1.15 lakh crore/ 99,600 crore (ex of HDFC twin merger). 

This assumes an effective CRR of 14.5% for the period concerned (4.5%+10%).

The shares of banks fell after the announcement with the Bank Nifty index falling over 1%. The major losers on the Bank Nifty index included AU Small Finance Bank falling over 2%, followed by Bandhan Bank, Kotak Mahindra Bank, Punjab National Bank, Axis Bank and Bank of Baroda declining over 1% each.

A critical reason behind weakness in banking stocks is that the RBI’s decision on ICRR is expected to cause interest loss for banks, as per analysts.

“Bank Nifty slipped into weakness as this announcement is negative for Banks. Higher forecast of inflation also doused hopes of an early beginning of rate cut impacting Bank stocks," said Dhiraj Relli, MD & CEO, HDFC Securities.

He believes banks may not help Nifty to continue to rise and focus could shift to other sectors in the near term.

Arora expects this would also lead to some interest loss for banks, as banks were parking the short term liquidity into STPL (short term personal loans) and money markets, instead of parking with RBI in VRRR, which also helped in some softening of CP/CD rates.

Further, Arora explained that the immediate impact of RBI absorbing liquidity via ICRR will be mild hardening of money market rates for borrowers including NBFCs or corporates, while for banks as well there will be slight impact on their NIMs (3-4 bps) depending on the instruments where they were parking the money (assuming 14.5% effective CRR).

Jahnavi Prabhakar, Economist at Bank of Baroda said that incremental change of NDTL between May 19, 2023 and July 28, 2023 is around 10 lakh crore.

“Considering 10% of the amount, which is around 1 lakh crore, which is required to be maintained as incremental CRR. If the same is invested in SDF with a yield of 6.25%, then 520 crore turns out to be the opportunity cost for banks," Prabhakar said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 10 Aug 2023, 03:26 PM IST
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