Being panic with the growing public unrest at banks and ATMs due to scarcity of cash inflows, the Reserve Bank of India (RBI) in a drastic move introduced an incremental Cash Reserve Ratio of 100 per cent for the fortnight which began yesterday. This extreme step is said to be taken
to absorb the surge in liquidity in banking system following demonetisation of high value notes.

CRR is the portion of the deposits which banks are required to park to the RBI. Currently it is at 4 per cent. As per the RBI guidelines, on the increase in Net Demand and Time Liabilities (NDTL) between September 16 and November 11, scheduled banks shall maintain an incremental CRR of 100 per cent, effective the fortnight beginning November 26, 2016.

As per the estimates, this could be 3.5 lakh crore rupees. RBI said, it will review the decision on December 9 or earlier as the incremental CRR is intended to be a temporary measure within RBI’s liquidity management framework to drain excess liquidity in the system.

RBI observed that 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 CRR as a purely temporary measure.

RBI stated that this move is intended to absorb a part of the surplus liquidity arising from the return of now defunct 500/1000 rupees notes to the banking system, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy.