Published on: September 15, 2023

Incremental cash reserve ratio

Incremental cash reserve ratio

Why in news? RBI to discontinue Incremental Cash Reserve Ratio(I-CRR) in a phased manner


  • The I-CRR, was introduced as a temporary measure to manage surplus liquidity
  • It was implemented to absorb excess liquidity generated by various factors notably the return of Rs 2000 notes to the banking system
  • The decision to discontinue is made to ensure the liquidity remains stable and money market functions in an orderly manner
  • Scheduled banks are required to maintain a 10 percent reserve on the increase in their net demand and time liabilities (NDTL)

What is CRR?

  • It is the liquid cash that scheduled commercial banks need to keep with RBI as a certain percentage of their demand liabilities. Currently, CRR is at 4.5 per cent.

What is I-CRR?

  • Unlike CRR, which applies to the total deposit base, ICRR specifically targets new deposits.
  • It is applied to the incremental increase in deposits made by customers within a certain period.
  • ICRR is a mechanism through which central banks can regulate the cash reserve requirement of banks when there is excess liquidity through the new deposits.
  • RBI earlier used this tool in 2016, when the system was flooded with higher liquidity due to demonetisation.

How Does It Work?

  • By imposing higher ICRR on incremental deposits, banks are encouraged to hold a portion of these funds in reserves.
  • As liquidity is sucked out, banks will have lesser money to lend, thus bringing down demand for goods and services, thus bringing down prices.
  • Short-term interest rates can move higher as the supply of funds get tight in the economy. That is another tool to bring down inflation.
  • It contributes to stabilizing the money supply, preventing inflationary pressures, and maintaining financial stability.