RBI research says when surplus liquidity persists above 1.5% of NDTL, for every percentage point increase in surplus liquidity, average inflation could increase by 60bps a year.
But surplus liquidity within the threshold of 1.5% of NDTL poses no risk to inflation. Today’s move to drain surplus liquidity is aimed at keeping a lid on inflation without hiking rates.
As per RBI assessment, it could drain liquidity by INR 1tn. Since CRR does not earn interest, it could cost banks INR 5.5bn if I-CRR is retained for 1 month, INR 11bn if it is retained for 2 months, and INR 16bn for 3 months.
In short, defying the central bank can be costly!