Predictable pause, and a CRR surprise

livemint.com:

RBI’s) monetary policy committee (MPC) on Thursday kept the policy rate and stance unchanged for the third time in a row, citing the need to watch the evolving inflation trajectory amid adverse weather conditions. All MPC members voted for a pause in the repo rate at 6.5%. Five out of six members also voted for a continuation of the “withdrawal of accommodation" stance.

However, in an unexpected move, RBI announced a 10% incremental cash reserve ratio (CRR) for banks on the increase in their net demand and time liabilities (NDTL) between 19 May and 28 July. This is primarily to address the liquidity overhang due to the withdrawal of ₹2,000 notes. This measure is similar to the 100% incremental CRR introduced between 26 November 2016 and 10 December 2016, following the demonetization of high-value notes.

RBI governor Shaktikanta Das said this may suck out nearly ₹1 trillion of liquidity from the system. The total liquidity in the system stood close to ₹3.5 trillion as of 8 August. “This was considered necessary in the background of liquidity overhang.

We considered it desirable in the interest of price and financial stability. It will have an impact on the inflation situation also. It is a temporary measure and will be reviewed on 8 September or earlier," Das said.