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RBI Increases Cash Reserve Ratio (CRR) for Scheduled Banks

On a review of current liquidity conditions, RBI has decided on 11th September 2004, to increase CRR of scheduled commercial banks, regional rural banks (RRBs), scheduled state co-operative banks and scheduled primary (urban) co-operative banks by one-half of one percentage point of their net demand and time liabilities (NDTL) in two stages.

In first stage, effective date (i.e. the fortnight beginning from) September 18, 2004 CRR on net demand and time liabilities (per cent) will be 4.75.

In second stage, effective date October 2, 2004 CRR will be 5.0%

Further, with effect from the fortnight beginning September 18, 2004, banks will be paid interest at the rate of 3.5 per cent per annum on their eligible cash balances maintained with RBI under CRR requirement as against the current practice of payment of interest at the Bank Rate (6.0 per cent per annum). The payment of interest on monthly basis will continue as at present.

The above measures are consistent with the present stance of monetary policy to meet credit growth and to support investment and export demand, given the current liquidity conditions.

As indicated in the annual monetary and credit policy Statement of 2002-03, the Reserve Bank will continue to pursue its medium-term objective of reducing CRR to its statutory minimum of 3.0 per cent, while retaining the option to use the CRR in both directions for liquidity management, as and when essential, in addition to other instruments.

As regards remuneration of eligible cash balances under CRR, it may be recalled that the Internal Group on Liquidity Adjustment Facility (December 2003) had recommended that "with substantial scaling down of CRR coupled with marked decline in overall interest rate structure in the economy and increasing liquidity needs of participants in the wake of higher interlinkages among different segments of the market, the degree to which CRR had been impacting banks as an implicit taxation earlier is considerably less in recent period. Accordingly, the remuneration of eligible cash balances at the Bank Rate is no longer justifiable and the remuneration of CRR, if any, be delinked from the Bank Rate and placed at a rate lower than the repo rate".

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