Two days after hiking the key interest rate by 25 basis points to slow the rise of inflation, the Reserve Bank of India (RBI) announced that banks need to maintain 99% of the required cash reserve ratio (CRR) daily from the earlier 90%, a move aimed at tightening liquidity management.

 The new measure comes into effect from the fortnight beginning 16 October.

The central bank also announced an open market operation (OMO) sale of government securities worth Rs 25,000 crore on 13 October, another tightening measure to drain out surplus liquidity from the banking system.

In July 2013, the RBI had prescribed a similar minimum daily CRR maintenance requirement to tackle volatility in the foreign exchange market following the US Federal Reserve’s “taper tantrum”.

"On a review of the current liquidity conditions, it has been decided to increase the minimum daily maintenance of the CRR from 90% of the requirement to 99% effective from the fortnight beginning 16 October  2026," the RBI said in a release on Friday.

CRR is the proportion of deposits banks must maintain as cash balances with the RBI. Banks earn no interest on these balances.

The RBI’s new move will help reduce the banking system liquidity and tighten money market conditions. The liquidity surplus stood at Rs 3.88 trillion as of 8 October.

The RBI has been taking several measures to absorb surplus liquidity from the system over the last two months, including conducting Variable Rate Reverse Repo (VRRR) auctions and bond purchases through open market operations.

During the monetary policy announced earlier this week, RBI Governor Sanjay Malhotra said the liquidity surplus will likely normalise within FY27. 

The heavy inflow of FCNR(B) deposits has led to the banking system being flushed with excess liquidity. Banks drew $133 billion of foreign currency non-resident (Bank), or FCNR(B), deposits under the RBI’s swap window.