Mumbai: Five days after raising the repo rate for the first time in over two and a half years, the Reserve Bank of India is now pulling cash out of the banking system with almost everything it has. This week, the central bank has tightened its grip on surplus liquidity on three fronts: a near-total daily cash reserve rule for banks, a Rs 25,000 crore bond sale, and a Rs 2 lakh crore reverse repo operation.
It is the most aggressive liquidity squeeze in years, and it shows the RBI means business about keeping overnight interest rates aligned with its new 5.50 per cent repo rate.
What the RBI did this week
- 99 per cent daily CRR floor: From the fortnight beginning October 16, banks must maintain at least 99 per cent of their prescribed cash reserve ratio on every single day, up from 90 per cent. Banks will have almost no room to dip below the requirement on any day.
- Rs 25,000 crore bond sale: The RBI sold up to Rs 25,000 crore of government securities on Tuesday, October 13, directly absorbing surplus cash from the system.
- Rs 2 lakh crore reverse repo: A three-day variable rate reverse repo ran on Monday, October 12, reversing on October 15, under which banks park surplus funds with the RBI.
The move comes right after the October 7 monetary policy decision, when Governor Sanjay Malhotra’s committee raised the repo rate by 25 basis points to 5.50 per cent and shifted its stance to “calibrated tightening”.
Why the RBI is draining cash
The banking system is flush with money. Surplus liquidity stood at around Rs 3.88 lakh crore as of October 8, swelled by heavy mobilisation of FCNR(B) deposits, which brought foreign currency into the system, and by month-end government expenditure, including salary and pension payments.
The RBI has been absorbing this excess for two months through reverse repo auctions and open market operations. But with liquidity this high, overnight market rates can drift well below the policy repo rate, blunting the impact of last week’s rate hike. The tighter CRR floor removes banks’ day-to-day flexibility and forces surplus cash back into the system less often, pushing overnight rates closer to 5.50 per cent.
There is another reason to watch: credit is running hot. Bank credit stood at Rs 229.95 lakh crore as of September 30, growing 19.4 per cent year on year, while deposits grew 17.8 per cent. Banks are lending faster than they are raising deposits, a gap the RBI does not want to see widen in a tightening cycle.
What it means for banks and borrowers
The obvious question is whether banks will get squeezed. Jefferies, in a note this week, expects the impact on banks’ net interest margins to be limited, estimating a potential rise in funding costs of just 1 to 2 basis points. Lenders may be able to pass on the higher costs to borrowers, the brokerage said, adding that it prefers banks over NBFCs in a rising-rate environment and sees up to 47 per cent upside in Bandhan Bank.
The 99 per cent daily floor is a middle path: it tightens without touching the headline 3 per cent CRR rate, so banks do not lose any reserves permanently, they simply lose the freedom to juggle them day to day.
This has happened before
The last time the RBI raised the minimum daily CRR maintenance to 99 per cent was in July 2013, in the middle of the infamous “taper tantrum”, when the US Federal Reserve’s hints at cutting bond purchases sent the rupee into free fall. Back then it was an emergency move to defend the currency. This time the context is calmer: an orderly mop-up of surplus cash rather than crisis management.
FAQs
What is the CRR?
The cash reserve ratio is the portion of a bank’s deposits it must keep as cash with the RBI, earning no interest. It currently stands at 3 per cent, meaning banks keep Rs 3 with the RBI for every Rs 100 in deposits.
What changed from October 16?
Banks must now hold at least 99 per cent of their required CRR balance on each day of the fortnight, up from 90 per cent. The fortnightly average requirement is unchanged.
Will this affect my loan or deposit rates?
Jefferies estimates funding costs for banks could rise by only 1 to 2 basis points, a small move that may or may not be passed on to borrowers. The bigger driver of your loan rates remains the 5.50 per cent repo rate.
Why is the RBI draining liquidity now?
Surplus liquidity of around Rs 3.88 lakh crore was pulling overnight market rates below the policy rate, weakening the effect of the October 7 rate hike. The squeeze keeps money-market rates aligned with the RBI’s tighter stance.
Is this the same as raising the CRR?
No. The headline CRR rate stays at 3 per cent. Only the minimum daily maintenance percentage has changed, from 90 to 99 per cent, giving banks much less day-to-day flexibility.
The message from Mint Street this week is clear: the rate hike was not the end of the tightening, it was the beginning. How banks, bond markets and borrowers adjust over the coming fortnights will decide how far this squeeze goes.
