Shaktikanta Das sounds more hawkish, hikes CRR to suck out over Rs 1 lakh cr excess liquidity

The Reserve Bank on Thursday raised the cash reserve ratio in an incremental 10 per cent in proportion to banks' liquidity, a move that will suck out over Rs 1 lakh crore from the system.

The move, announced along with the bi-monthly policy review, was the best option under the current circumstances and there is enough liquidity in the system for the banks to continue their lending operations, Reserve Bank Governor Shaktikanta Das told reporters.

The RBI monetary Policy Committee (MPC) unanimously left the repo rate unchanged at 6.50 per cent, but reduced the money supply by raising the cash reserve ratio (CRR) to 10 per cent on the incremental NDTL (net demand and time liabilities) over the last three month, for a limited period till September 8.

"The move will suck out a little over Rs 1 lakh crore of excess liquidity from the system," Das said.

According to latest data, at Rs 2.48 lakh crore, the surplus liquidity in the system in August was at a 14 month high -- the highest since June 2022.

Das' deputy and the head of the monetary policy department, Michael Patra said the proposed September 8 review will purely be data-dependent.

"We will have to go beyond Arjuna's eyes and act quickly if the spiraling vegetable prices become more widespread and become generalized, forcing us to deploy any appropriate tool under our command to tame it and that it may not just be a rate hike, but any tool under our command will be deployed," Das said.

The Governor further noted that "the job on inflation is still not done. Inflationary risks persist amidst volatile international food and energy prices, lingering geopolitical tensions and weather-related uncertainties."

One of the reasons for the spike in liquidity is due to the fact that over 90 per cent of the Rs 3.6 lakh crore of the Rs 2,000 banknotes withdrawn on May 19, have come back to banks, Das said.

He assured that the public won't face any crunch as they prepare for the long festive season nor will the system and industry face any liquidity issue to pay the advance tax (September 15) or GST (September 20).

"We have done our internal assessment which showed that there will still be adequate liquidity left with the banking system," Das said.

The Reserve Bank-led MPC left the key interest rates unchanged for a third straight time at 6.50 per cent but signalled a tighter policy if rising food prices drive inflation higher.

The MPC retained the stance on "withdrawal of accommodation" but Das sounded hawkish when he highlighted that headline inflation needs to subside sustainably below 4 per cent and any surge in the inflation print, if continued for a longer period, may necessitate fresh action.

"Bringing headline inflation within the tolerance band is not enough; we need to remain firmly focused on aligning inflation to the target of 4.0 per cent," the Governor said.

Accordingly the central bank also raised the inflation forecast to 5.4 per cent from 5.1 per cent earlier, citing pressures from food prices. In the September quarter, it sees inflation at 6.2 per cent, significantly higher than the 5.2 per cent earlier forecast.

"We do look through idiosyncratic shocks but if it shows signs of persistence, we have to act," he said detailing decision of the MPC, which drew confidence to leave the rates unchanged from moderation in core price prints and expects a seasonal correction in food prices in the fourth quarter of 2023.

The RBI also retained its GDP projection at 6.5 per cent for the current fiscal, saying aggregate demand conditions continue to be buoyant.

Replying to a question on whether it will also include the impact of the merger of HDFC with HDFC Bank, Das said the move is applicable to all scheduled banks.