100% CRR for Banks, Nifty and Bank Nifty might see a Hit

The RBI has asked banks

to temporarily maintain
additional average daily
balance with it for
draining out the surplus
liquidity with them. This
follows
the
banking
system being swamped
with liquidity sparked off
by a heavy inflow of
deposits, because of the
ongoing demonetization
exercise.
The cash reserve ratio (CRR), or the portion of deposits that banks have to
maintain with the central bank, however, continues at 4 per cent of deposits.
The excess of liquidity with banks is highlighted by the fact that they collectively
parked RS. 2,27,242 crore in the three reverse repo auction conducted by the
RBI on Friday.
In a circular to banks, the RBI said that on the boost in deposits between
September 16 and November 11, scheduled banks will have to maintain
incremental CRR of 100 per cent, effective from the fortnight beginning
November 26.
This may put pressure on Nifty share price which opened with the decline of
0.27% and Bank Nifty the most.
This measure is mean to absorb a part of the surplus liquidity arising from the
return of the demonetized Rs. 500 and Rs. 1,000 bank notes, while leaving
sufficient liquidity with banks to meet the credit needs of various sectors.

At present, all banks are to maintain minimum CRR balances up to 95 per cent of
the average daily required reserves for a reporting fortnight on all days of the
fortnight.
Surge in Deposits
The RBI observed that with the demonetization decision, there has been a rush
in deposits relative to the increase in bank credit, leading to large excess
liquidity in the system.
It assessed that the scale of surplus liquidity available with the banking system
is likely to increase further in the fortnights ahead. In view of this, it has been
decided to soak up a part of this surplus liquidity by applying an incremental
CRR as a purely temporary measure.
As the incremental CRR is planned to be a temporary measure, it will be
reviewed on December 9 or even earlier.
Parking of Old Currency Notes:
Also, to decongest storage facility of banks of old Rs 500 and Rs. 1,000 notes, RBI
has allowed lenders to put such currencies at currency chests at the district level
in view of rising deposits due to the demonetization drive.
The central bank said that a currency chest operating at the point to be called
Designated Chest (DC) will be needed to operate a separate vault, to be named
Chest Guarantee Vault (CGV), as an extended wing of it.
RBI said in a notification that Banks, preferably those not having any currency
chest, will deposit such notes in sealed boxes and will get the value of the notes
to the credit of their current a/c with the chest branch. The facility will also be
accessible at post offices if they are maintaining current account with the chest
branch managing CGV.
The notification further stated that the regional office of RBI will arrange
evacuation of notes from the district chest on priority basis.

Thereafter, notes will be subjected to thorough examination and the recognition

of deficiencies namely shortage, counterfeit notes, mutilated notes, etc during
processing at RBI will be recovered from the chest which, in turn, will recover
the same from the tendering bank or post office.
This is extension of the last week's scheme. The central bank has decided to
revitalize the Guarantee Scheme wherein banks can deposit the notes directly
with the regional offices of RBI under whose jurisdiction they are located.
Disclaimer
The investment advice or guidance provided by way of recommendations, reports or other ways are solely the personal views of the research
team. Users are advised to use the data for the purpose of information and rely on their own judgment while making investment decision.
Dynamic Equities Pvt. Ltd - SEBI Investment Advisory Reg. No.: INA300002022

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Article Written by
Tanaya Nath