RBI curbs excess liquidity amid war against inflation

Manages to drain out over ₹2 lakh crore from banking system in nearly 3 weeks

- SACHIN KUMAR

WHILE the Reserve Bank of India's (RBI) war against inflation is far from over, the central bank seems to be winning the battle against excess liquidity. By deploying several weapons from its armoury, the RBI has managed to drain out over ₹2 lakh crore from the banking system in nearly three weeks.

As per RBI data, liquidity was around ₹2.64 lakh crore on August 10, which went down to ₹1.21 lakh crore on August 13 and on August 21 the system transitioned into a deficit of ₹23,644.43 crore. However, two days after on August 24, the overall liquidity moved into a surplus of nearly ₹25,800 crore. RBI's decision to impose incremental cash reserve ratio (ICRR) has played a crucial role in sucking excess liquidity.

RBI Governor Shaktikanta Das on August 10 announced banks would be required to maintain ICRR of 10% on increase in their deposits between May 19 and July 28, to absorb surplus liquidity of ₹1 lakh crore from the banking system.

Withdrawal of ₹2000 notes 

Surge in liquidity due to withdrawal of ₹2,000 note from circulation was the main trigger behind this decision. The RBI announced on August 1 that nearly 88% of ₹2,000 banknotes valued at ₹3.14 lakh crore have returned to the banking system. Out of the total notes returned, about 87% valuing ₹2.73 lakh crore have come back in the form of deposits and the remaining about 13% has been exchanged into other denomination banknotes.

RBI is not comfortable with excess liquidity as extra money in the system dilutes its efforts to tame inflation. The central bank wants overnight call money rate to be close to repo rate.