Source: Business Standard
Context: The RBI may tighten liquidity by imposing an incremental cash reserve ratio (iCRR) — requiring banks to park a larger share of fresh deposits with the central bank — before resorting to a repo rate hike, to make monetary transmission more effective.
What Is Incremental CRR
- CRR is the share of a bank’s Net Demand and Time Liabilities (NDTL) kept with the RBI, earning no interest
- An incremental CRR applies not to the whole deposit base, but only to the increase in deposits over a specified period
- Why the incremental form is used: a full CRR hike hits every bank’s entire deposit base, which is blunt and costly. An iCRR targets only recent deposit growth, draining the new surplus without penalising the existing book
Simple Example
- Suppose a bank had deposits of ₹1,000 crore earlier and now its deposits increase to ₹1,200 crore.
- The incremental deposit = ₹200 crore.
- If RBI imposes an Incremental CRR of 10%, the bank has to keep:
- 10% of ₹200 crore = ₹20 crore
- with the RBI as additional cash reserve.
Why does RBI use Incremental CRR?
- To absorb excess liquidity from the banking system.
- To reduce the amount of money available for banks to lend.
- To control inflationary pressure.
- It can be used as a temporary liquidity-management measure.
Normal CRR vs Incremental CRR
- CRR: Applies to a bank’s overall Net Demand and Time Liabilities (NDTL).
- Incremental CRR: Applies only to the additional/incremental deposits accumulated during a specified period.
