The RBI has asked banks to consider deposit accumulated during the demonetization period as incremental Cash Reserve Ratio. This means that banks can’t lend out of the sudden flood of deposits. The RBI instructed that deposit from September 16 to November 11 as transitory deposit.
Interestingly, RBI’s calculation of temporary deposit goes back to September 16 which means that demonetization related deposits started from that date onwards. There was accusation that deposits started going up high even two-three months back the demonetization date of November 8.
The RBI press release indicated that a 100% CRR should be kept for the deposits accrued during this period. “All Scheduled Commercial Banks/ Regional Rural Banks / all Scheduled Primary (Urban) Co-operative Banks / all Scheduled State Co-operative Banks to maintain with the Reserve Bank of India, effective from the fortnight beginning November 26, 2016 an incremental CRR of 100 per cent on the increase in NDTL between September 16, 2016 and November 11, 2016.”
The present decision is to manage the excess liquidity conditions prevailing in the banking system. Already, the inter- bank call money market has fallen below the repo rate. This may encourage banks to borrow from call money market and lend it to RBI; which is often called as arbitrage.
The press release indicated that RBI will review the decision on December 6. Putting the demonetization deposit as CRR means banks can’t give any loans out of these temporary deposits. Building assets or giving loans out of this very short term money will be disastrous for banks as these deposits should be given back quickly. Some banks have already made wrong announcements about loan hikes out of the windfall deposit bonanza.