New Delhi [India], September 9 : The Reserve Bank of India may not need to raise the cash reserve ratio (CRR) in the immediate term as the banking system's surplus liquidity is expected to moderate through FY27, with the central bank able to use more flexible tools such as variable rate reverse repos and forex swaps, noted a research report by Union Bank of India.
The report said banking-system surplus liquidity had risen to around Rs 10.36 lakh crore by Monday, following the strong response to the RBI's special foreign-currency mobilisation programme, which brought in USD 136.38 billion by the end of August.
While the inflows strengthened India's external buffers and provided banks with additional deposit resources, the forex swaps also released a corresponding amount of rupee liquidity into the banking system, creating a new policy challenge for the RBI, the report said.
UBI Research expects the surplus to moderate materially through FY27 as currency leakage, government cash movements and credit demand absorb some of the liquidity. It estimates that core liquidity could stand at around Rs 2.96 lakh crore, or 1 per cent of net demand and time liabilities, by end-March 2027 after taking into account RBI liquidity measures.
The report expects the RBI to prioritise VRRR auctions, forex sell-buy swaps and short-term open market operation sales before considering a CRR hike. It said CRR should remain a fallback option if the liquidity surplus proves more persistent than expected.
A CRR hike would be a relatively blunt measure because it locks bank funds with the RBI without interest and could reduce resources available for lending, the report said. It estimated that a 50-basis-point CRR increase would absorb around Rs 1.4 lakh crore from the banking system, while a 100-basis-point increase would absorb about Rs 2.8 lakh crore.
The report also said seasonal factors could help absorb part of the surplus as currency demand, festive spending, retail lending and working-capital demand typically increase during September-November.
UBI Research said an immediate CRR hike would need to be reconsidered only if surplus liquidity remains around Rs 8-10 lakh crore despite sustained VRRR operations, banks show weak participation in longer-duration VRRR auctions and the weighted average call rate remains significantly below the repo rate.
“If all three show up together, an Incremental CRR (I-CRR) looks like the better tool than an outright, system-wide hike,” the report said.
The report's base case remains that the RBI should “calibrate liquidity, don't eliminate it”, using reversible measures first while keeping CRR as an insurance option.