RBI May Hold Off On Immediate CRR Hike As Surplus Banking Liquidity Expected To Ease Through FY27: UBI Report

New Delhi, Sep 9 (KNN) The Reserve Bank of India may not need to raise the cash reserve ratio (CRR) in the near term as surplus liquidity in the banking system is expected to moderate through FY27, according to a research report by Union Bank of India (UBI).

Surplus liquidity had risen to around Rs 10.36 lakh crore by Monday following a strong response to the RBI’s special foreign-currency mobilisation programme, which attracted USD 136.38 billion by the end of August, ANI reported, citing the report.

While the inflows strengthened India’s external buffers and added to banks’ deposit resources, forex swaps also released a corresponding amount of rupee liquidity into the banking system, creating a policy challenge for the RBI.

Flexible Tools Preferred

UBI Research expects surplus liquidity to decline as currency leakage, government cash movements and credit demand absorb part of the excess. It estimates core liquidity at around Rs 2.96 lakh crore, or 1 per cent of net demand and time liabilities, by March 2027, after factoring in RBI liquidity measures.

The report expects the RBI to prioritise variable rate reverse repo (VRRR) auctions, forex sell-buy swaps and short-term open market operation sales before considering a CRR hike. CRR, it said, should remain a fallback option if surplus liquidity proves more persistent than expected.

A CRR hike would be a relatively blunt tool as it locks bank funds with the RBI without interest and could reduce resources available for lending. A 50-basis-point hike could absorb around Rs 1.4 lakh crore, while a 100-basis-point increase could absorb about Rs 2.8 lakh crore, the report estimated.

Conditions for CRR Intervention

Seasonal factors could also absorb some liquidity as currency demand, festive spending, retail lending and working-capital requirements typically rise during September-November.

UBI Research said an immediate CRR hike may need reconsideration if surplus liquidity remains around Rs 8-10 lakh crore despite sustained VRRR operations, banks show weak participation in longer-duration VRRR auctions and the weighted average call rate remains significantly below the repo rate.

If all three conditions emerge together, an Incremental Cash Reserve Ratio (I-CRR) could be a better option than a system-wide CRR hike, the report said.

Its base case is for the RBI to “calibrate liquidity, don’t eliminate it”, using reversible measures first while retaining CRR as an insurance option.

(KNN Bureau)