India’s central bank will gradually unwind a directive for banks to set aside excess cash and absorb liquidity, in a sign policymakers are taking some comfort that recent measures to curb inflation are paying off.
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India’s central bank will gradually unwind a directive for banks to set aside excess cash and absorb liquidity, in a sign policymakers are taking some comfort that recent measures to curb inflation are paying off.
“The amounts impounded under the I-CRR would be released in stages so that system liquidity is not subjected to sudden shocks and money markets function in an orderly manner,” the Reserve Bank of India said in a statement Friday, referring to the incremental cash reserve ratio.
Starting from Saturday, 25% of the ICRR funds will be released, followed by another 25% on Sept.
23. The rest would be released by Oct. 7, the RBI said in a statement.
The benchmark 10-year bond yields edged up one basis point to 7.19% before paring. The 5-year bonds, which tend to be more sensitive to liquidity conditions, saw yields increase by one basis point before reversing the move.
In the monetary policy review last month, the RBI raised the incremental cash reserve ratio temporarily to 10% from 4.5% of the deposit base.
Liquidity in India has been surging with more than 90% of highest denomination 2,000-rupee notes returned to the financial system ahead of an RBI-imposed deadline for end-Sept.
The central bank said the decision was taken as the currency notes aren’t commonly used in transactions.
Indian banks have been reluctant to park the money with the RBI in 14-day variable rate reserve repo — a tool used to absorb excess liquidity.
The lenders preferred to channel the money to the RBI’s overnight facility, which prompted the central bank to tweak the ICRR and drain out funds.
Retail inflation has jumped to a 15-month high in July on surging food costs on the back of weaker monsoon rains affecting crops though excess liquidity and the festival season has some part to play.
–With assistance from Ronojoy Mazumdar.
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