The Reserve Bank of India (RBI) will take measures to reduce liquidity overhang in the banking system so as to contain price pressures.

“The Reserve Bank’s liquidity management has been nimble and two-sided as per requirement. We will manage the liquidity overhang proactively using the various instruments at our command while ensuring that the banking system has adequate liquidity to meet the productive requirements of the economy,” said RBI Governor Shaktikanta Das, as per the minutes of the monetary policy committee’s (MPC’s) August meeting released on Thursday.

RBI Deputy Governor Michael Debabrata Patra said liquidity overhang in the banking system pose a direct threat to the inflation target and financial stability, as per the minutes of the MPC.

“Withdrawal of excess liquidity should engage primacy in the attention of the RBI going forward as it presents a direct threat to the RBI/MPC resolve to align India’s inflation with the target, besides the potential risks to financial stability,” Patra said.

In its August monetary policy, the RBI introduced Incremental cash reserve ratio (I-CRR) to absorb surplus liquidity in the economy.

With effect from the fortnight beginning 12 August, scheduled banks will have to maintain an I-CRR of 10% of the increase in their net demand and time liabilities (NDTL) between 19 May and 28 July.

This tightened liquidity conditions in the banking system and it fell to deficit for the first time since start of this financial year.