RBI has asked banks to temporarily maintain additional average daily balance to drain out surplus liquidity with them.
This follows the banking system being flooded with liquidity triggered by heavy inflow of deposits, due to ongoing demonetisation exercise.
CRR or slice of deposits that banks have to maintain with the central bank remains at 4 percent of the deposits.
Surfeit of liquidity is on account of the fact that they altogether parked INR 2,27,242 crore in 3 reverse repo auction conducted by the RBI on Nov 26, 2016.
In a circular to banks, RBI said increase in deposits between Sept 16 and Nov 11, scheduled banks will have to maintain incremental CRR of 100 percent beginning Nov 26.
This measure will absorb a part of the surplus liquidity arising from the return of INR 500 and 1000 bank notes, while leaving adequate liquidity with banks to meet credit needs of numerous sectors.
RBI has observed that with the demonetisation decision, there has been an increase in deposits relative to expansion in bank credit leading to large excess liquidity in the system.
It assessed the magnitude of surplus liquidity with the banking system is expected to rise further in coming weeks.
This surplus liquidity will be partly absorbed by applying incremental CRR.
What is Reverse Repo Window?Reverse repo is a facility provided by the regulator to deposit excess funds by banks for which they earn interest.
