The Reserve Bank of India (RBI) Friday said it will gradually phase out incremental cash reserve ratio (I-CRR), a liquidity-draining out measure which required banks to park an additional 10% of their fresh deposits with the central bank.

Starting 9 September, 25% of the I-CRR will be phased out. Another 25% will be released on 23 September. The rest 50% of the I-CRR will be phased out on 7 October.

"Based on an assessment of current and evolving liquidity conditions, it has been decided that the amounts impounded under the I-CRR would be released in stages so that system liquidity is not subjected to sudden shocks and money markets function in an orderly manner," RBI said.

Last month, the RBI in its monetary policy announced that banks should maintain I-CRR of 10% on the increase in their net demand and time liabilities (NDTL) between 19 May and 28 July. The aim was to primarily flush out the surplus liquidity following the return of 90% of Rs 2,000 notes into the banking system. 

"It has been decided that with effect from the fortnight beginning August 12, 2023, scheduled banks shall maintain an incremental cash reserve ratio of 10% on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023," RBI Governor Shaktikanta Das had said while announcing the Monetary Policy Committee's decisions on 10 August.

The new measure, Das said, could withdraw around Rs 1 lakh crore in liquidity from the banking system. 

Since then, the surplus liquidity has fallen from Rs 3.5 lakh crore to Rs 76,000 crore. In fact, on 22 August, the banking system liquidity slipped into deficit for the first time this financial year.

With the I-CRR now removed, analysts say they expect money market rates to moderate.