Many private sector banks have partly redeemed their investments in liquid schemes of mutual funds following the Reserve Bank of India asking scheduled banks to temporarily maintain incremental cash reserve ratio (I-CRR) with effect from the fortnight beginning August 12, 2023.

• BL Explainer. What is ICRR, and its impact on liquidity

Redemption of investments parked in the liquid schemes of mutual funds was done specifically to meet the I-CRR prescription, according to MF industry players.

The players assessed that these banks would have redeemed about ₹3,000 crore from MF schemes for meeting RBI diktat.

“RBI has tightened liquidity via I-CRR. So, some private sector banks have withdrawn funds from liquid schemes of mutual funds…Banks, especially private sector ones, need funds to maintain additional CRR. Public sector banks have enough inflows so they need not redeem their investment to meet CRR,” said a senior mutual fund executive.

Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC, said banks first tap their treasury bills holdings and liquid funds investments to meet short-term liquidity requirements. 

Liquid funds might face some outflows during the latter half of August and September due to incremental CRR requirements.

Pathak said: “Even after the I-CRR banking system liquidity will remain in surplus of over ₹1 lakh crore. So, we do not expect any significant outflows from liquid funds.”

The mutual fund industry witnessed an inflow of ₹61,440 crore in debt schemes last month, with liquid funds alone accounting for an inflow of ₹51,938 crore on the back of excess liquidity in the banking and corporate sectors.

RBI asked scheduled banks to temporarily maintain an I-CRR of 10 per cent on the increase in their deposits between May 19 and July 28, to absorb surplus liquidity of ₹1 lakh crore from the banking system.

RBI Governor Shaktikanta Das, in his bi-monthly monetary policy statement, observed that the level of surplus liquidity in the system had gone up in recent months on the back of the return of ₹2000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows.

The overall daily absorption under the liquidity adjustment facility (LAF) was ₹1.7 lakh crore in June and ₹1.8 lakh crore in July.

Das emphasised that I-CRR is a temporary measure for managing the liquidity overhang. Even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy.

The Governor said the I-CRR will be reviewed on September 8 or earlier to return the impounded funds to the banking system ahead of the festival seasoneven as he underscored that the CRR remains unchanged at 4.5 per cent.

ICICI Securities, in a report, said the interest income hit due to additional CRR requirements appears negligible for the banking system.

Further, as most banks have strong surplus liquidity, additional CRR should not impact the credit offtake.

However, HDFC Bank appears more sensitive to the incremental CRR requirement as it would have bloated Net Demand and Time Liabilities (Deposits) post-merger of parent HDFC with the Bank, I-Sec said.