RBI provides some relief to people depositing in legal tender

That’s because the CRR – which is the portion of deposit to be compulsorily deposited with the RBI – doesn’t earn an interest. Since then, this demonetisation plan has fetched Rs 8.1 lakh crore in bank accounts.

Yes Bank stated that CRR hike is to be viewed as a temporary response which will start reversing once the deposit mobilisation in banks reaches a steady state. The yield on the 10-year benchmark government bond climbed 10 basis points to 6.33 per cent.

First, at a time when currency in existing lower denominations (Rs 100, Rs 50 and Rs 10) is a luxury and the new ones (new notes of Rs 2,000 and Rs 500) a rarity, why would someone deposit cash in these denominations in a bank?

It said the strong action could also be aimed at signalling RBI’s reluctance on market interest rates falling too sharply, too soon in the present global context.

Banking shares tumbled, with State Bank of India down 2.8 percent.

Banks had been exultant over the sudden access to cheap funds as a result of the demonetisation-induced deposit rush and had raised the prospect of cutting lending rates across the board.

The offsetting impact of a larger negative carry on CRR compared with cheaper deposits would restrict any significant downward movement of MCLR, affecting smooth monetary transmission, it said.

MSS bonds, which were introduced during former RBI governor Yaga Venugopal Reddy’s tenure in 2005, are typically issued by the central bank to manage liquidity operations when intervening in the foreign exchange market.

The government’s borrowing programme budgeted at Rs 6 lakh crore in this year’s budget is largely dependent on dated securities.

About Rs 2.16 lakh crore had been withdrawn as cash. “Thus, the system liquidity will remain comfortable”, SBI research paper said. Communication regarding forward guidance in terms of what constitutes “reactive policy” based on market developments and decisions based on the medium term outlook must be given by RBI. However, they would have to continue to pay interest to savings account holders.

“Their circular placing a 100 percent cash reserve requirement (CRR) on fresh deposits should have come on the 8th or 9th November, not on the 26th (of November)”.

“The magnitude of surplus liquidity available with the banking system is expected to increase further in the fortnights ahead”. The RBI had last cut the repo rate in October, and analysts had expected another cut by early 2017 after inflation has continued to decline. On Monday, it relaxed the rule for those who make cash deposits in valid currency.