The Incremental Cash Reserve Ratio (iCRR) is a temporary liquidity-management tool used by the Reserve Bank of India (RBI) to absorb excess cash from the banking system.
Unlike the regular Cash Reserve Ratio (CRR), which applies to a bank’s overall Net Demand and Time Liabilities (NDTL), iCRR is imposed on the incremental deposits accumulated during a specified period.
Why Does RBI Use iCRR?
Absorbing Excess Liquidity: A sudden increase in bank deposits or liquidity injections can leave banks with substantial surplus funds. iCRR allows the RBI to absorb part of this liquidity without permanently changing the regular CRR.
Strengthening Monetary Policy Transmission: Excess liquidity can push short-term market rates below the RBI’s desired level. By temporarily absorbing surplus cash, iCRR helps improve the transmission of monetary policy.
Temporary Alternative to CRR Changes: Unlike a permanent increase in the CRR, iCRR is designed as a short-term and targeted measure. Once liquidity conditions normalise, the RBI can withdraw the requirement.
Example: RBI’s iCRR Measure in 2023
In August 2023, the RBI introduced an incremental CRR of 10% on the increase in banks’ NDTL during the specified period. The measure was aimed at absorbing the surplus liquidity that had accumulated in the banking system, including liquidity associated with the withdrawal of ₹2,000 banknotes and other factors.
The RBI subsequently phased out the measure as liquidity conditions evolved.
iCRR vs CRR
| Basis | CRR | iCRR |
| Meaning | Cash reserve requirement on banks’ NDTL | Additional reserve requirement on incremental NDTL |
| Nature | Regular monetary requirement | Temporary liquidity-management measure |
| Coverage | Applicable NDTL as prescribed by RBI | Fresh/incremental deposits during a specified period |
| Purpose | Maintain liquidity and monetary stability | Absorb sudden excess liquidity |
| Duration | Ongoing requirement | Generally used for a limited period |
Significance of iCRR
The iCRR gives the RBI a flexible tool to manage short-term liquidity without immediately changing the structural CRR.
It is particularly useful when the banking system receives a temporary liquidity surge and the RBI wants to prevent excess funds from putting downward pressure on money-market rates.
Limitations
- Higher cost for banks: Banks cannot earn interest on the funds kept with the RBI.
- Reduced lendable funds: A portion of banks’ incremental deposits becomes temporarily unavailable for lending.
- Short-term nature: iCRR is useful for managing temporary liquidity conditions but is not a substitute for broader monetary-policy tools.
- Impact on profitability: If maintained for an extended period, it can affect banks’ interest income and margins.
FAQs
What is iCRR?
iCRR is a temporary RBI measure requiring banks to maintain an additional portion of their incremental NDTL with the RBI.
Why does RBI impose iCRR?
It is used primarily to absorb excess liquidity and keep short-term money-market conditions aligned with the RBI’s monetary-policy stance.
Do banks earn interest on iCRR balances?
No. Like CRR balances, funds maintained under iCRR do not earn interest.
Is iCRR a permanent requirement?
No. It is generally a temporary measure introduced to address specific liquidity conditions.
When did RBI introduce iCRR recently?
The RBI introduced a 10% incremental CRR in August 2023 to absorb surplus liquidity from the banking system.
Ravi Raaz
Hassan Khan
Shadab Ali