RBI tightens daily cash reserve rules as banking system liquidity stays elevated

Mumbai: The Reserve Bank of India (RBI) on Friday raised the minimum daily cash reserve requirement for banks to 99% from 90%, while leaving the overall cash reserve ratio (CRR) unchanged at 3%.

The change takes effect from the fortnight ending 31 October.

Banks must maintain a CRR of 3% of their deposits with the central bank, measured as an average over a fortnight. So far, they were required to hold only 90% of that amount on any given day, allowing them to make up the shortfall later in the period. The cash reserve ratio is the portion of their deposits that banks must keep with the RBI in cash. These deposits don’t earn any interest and cannot be lent out, making it a key tool for managing liquidity in the banking system.

“Every scheduled bank shall maintain minimum CRR of not less than 90% of the required CRR on all days during the reporting fortnight till 15 October, 2026, and 99% from the fortnight beginning 16 October, 2026, in such a manner that the average of CRR maintained daily shall not be less than the CRR prescribed by the Reserve Bank,” the central bank said in a notification.

The move is likely aimed at draining the massive liquidity surplus in the banking system following a surge in dollar deposits through the RBI’s foreign currency non-resident bank (FCNR-B) deposit scheme, which ended on 31 August.

“I wouldn’t say this is a case of increasing the CRR. It is a temporary measure to take care of excess liquidity. The CRR requirement itself has not changed, but the amount banks have to maintain on a daily basis has increased,” said Madan Sabnavis, chief economist at Bank of Baroda.

The move ensures that more cash is held within the regulatory framework, reducing surplus liquidity in the system, Sabnavis said. Such a measure is typically adopted when liquidity is in surplus, and is unlikely to remain in place indefinitely, he added.

“It is a way of impounding resources. While the CRR has not changed in regulatory terms, the mechanics of maintaining it have changed,” he said.

The move comes two days after RBI governor Sanjay Malhotra, in the post-monetary policy conference on 7 October, said that hiking the CRR may be one of the last tools that the central bank uses to curb excess liquidity in the banking system. “I do not want to rule out anything because it is still an evolving and an uncertain world. But, this (CRR hike) is something which will be one of our least preferred modes of taking out liquidity.”

Malhotra also said that the use of FCNR deposits by banks is already being reflected in the strong credit growth in September, but given that the amount is “so large”, the RBI would not want banks to use them overnight. “They need to do their due diligence properly and take the time to use these deposits,” he said. As such, surplus liquidity is not a “very long-term phenomenon” and that the bulk of it should get absorbed in the current financial year itself.

According to latest RBI data, non-food bank credit rose 18.8% year-on-year in August, up from 10.2% in the same period last year. For the fortnight ended 15 September, bank credit was up 17.9% from a year earlier, as per banks’ statement of position released by RBI.

“It (the CRR hike) will ensure that on a day-to-day basis, CRR compliance is tighter, ensuring call rate moves towards the repo rate,” Gaura Sengupta, chief economist at IDFC FIRST Bank said. “It shouldn’t be seen as withdrawal because banks maintain 100% of the CRR requirement over the 15-day period.”

The central bank on Wednesday raised the repo rate by 25 basis points to 5.5% to contain rising inflation, while signalling the possibility of further hikes.

Amid geopolitical tensions and tariff-related concerns, the RBI had in June 2025 cut the CRR by a sharp 1%, to be implemented in a phased manner by 29 November 2025. The reduction helped infuse around ₹2.5 trillion of durable liquidity into the banking system with the objective of lowering banks’ funding costs, improving monetary policy transmissions and supporting credit growth to productive sectors of the economy.

System liquidity remained tight through May 2026, while a sharp depreciation of the rupee added to the pressure, prompting the RBI to announce the FCNR scheme on 8 June 2026 to prop up the local currency.

Under the scheme, fresh FCNR(B) deposits with tenures of 3-5 years mobilised from 8 June, and non-resident (external) rupee (NRE) term deposits with tenures of over three years mobilised from 19 June, were exempted from CRR and statutory liquidity ratio (SLR) requirements.

Banks raised $127 billion in foreign-currency deposits under the scheme, beating expectations and prompting the RBI to close it on 31 August, a month ahead of the original deadline of 30 September. The banking system subsequently saw a sharp liquidity surplus, which peaked at over ₹10 trillion in early September. The liquidity surplus stood at ₹4.7 trillion as at the end of September, lower than ₹6.7 trillion a month ago, as per a note by Nomura Research dated 2 October.

As a part of its liquidity management, the RBI has responded with large variable rate reverse repo (VRRR) operations, dollar/rupee swaps and open market sale of government securities worth ₹1 trillion in four tranches. On Friday, it announced another OMO sale of ₹25,000 crore to be held on 13 October.