Money market experts have indicated that the phased withdrawal of the Incremental Cash Reserve Ratio (I-CRR) is expected to alleviate the strain on the banking system caused by significant outflows later this month due to tax and auction-related payments. This move is seen as a way to counterbalance the outflows in September with the return of these funds, along with other inflows into the banking system.
The central bank, on 8 September, announced the gradual discontinuation of the I-CRR following a review. It clarified that the I-CRR amount would be released in stages to ensure that system liquidity is not disrupted suddenly, allowing money markets to function smoothly.
Arun Bansal, Executive Director Head of Treasury at IDBI Bank, explained, "Phased withdrawal of I-CRR will help to ease outflow pressure on account of goods and services tax (GST) and advance tax of more than Rs 2.25 lakh crore."
Market experts anticipate liquidity challenges in the banking system, particularly after the outflows related to advance tax payments (approximately Rs 1 lakh crore on September 15) and GST payments (worth Rs 1.5 lakh crore on 20 September). Auction-related outflows are also expected to add to this pressure.
Nevertheless, some relief is expected from the redemption of bonds and coupon payments during the month.
Ajay Manglunia, Managing Director and Head of the Investment Group at JM Financial, noted that the phased withdrawal of the I-CRR aligns well with the timing of income tax and GST outflows in September.
The Reserve Bank of India (RBI) outlined the release schedule for the I-CRR funds, with 25 per cent released on 9 September, another 25 per cent on 23 September, and the remaining 50 per cent on 7 October. This phased approach is designed to manage liquidity and money market stability.
The banking system is anticipated to maintain a neutral to slightly surplus liquidity position following the tax outflows. Currently, there is a liquidity surplus of approximately Rs 76,047.44 crore in the banking system as of 7 September.
In terms of money market rates, experts do not foresee a significant impact, as liquidity is expected to remain in surplus. However, banks may consider issuing more certificates of deposit and Tier 2 bonds with the approach of advance tax outflows at the half-yearly closing.
Overall, the phased withdrawal of the I-CRR aims to manage liquidity effectively and maintain stability in the banking system amidst various financial dynamics.