Indian banking stocks gained as the move is largely positive for lenders.
The Reserve Bank of India will wind down, in phases, the incremental cash reserve ratio (I-CRR) requirement imposed on banks by October 7, it said on Friday.
The central bank said it will release 25% of the I-CRR funds on September 9, another 25% on September 23 and the remaining on October 7.
"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," the RBI said in a statement.
Banking system liquidity had slipped into deficit for the first time this fiscal after this move, but has risen since then and was over 750 billion rupees ($9.05 billion).
The move effectively means maintaining I-CRR of 7.5% and 5% for the next two fortnights, starting on September 9 and September 23 respectively, which is more or less along expected lines, a treasury head with a private bank said, requesting anonymity as he is not authorised to speak to the media.
Indian banking stocks gained as the move is largely positive for lenders.
In August, the RBI had asked banks to hold an I-CRR of 10% on the increase in deposits between May 19 and July 28, withdrawing over 1 trillion rupees of banking system liquidity.
On Wednesday, Reuters reported that market participants anticipated that the RBI would continue with I-CRR, with some expecting the ratio to be lowered to 5%-8% ahead of twin tax outflows that are due over the next two weeks.
Advance tax payments are due around September 15, while Goods and Service Tax outflows are scheduled for September 20. Traders expect aggregate outflows of about 2.2 to 2.5 trillion rupees.
"The calibrated phasing out of I-CRR is a positive move as central bank has aligned the withdrawal with the advance tax and GST outflows and will ensure system liquidity is back in the system ahead of festive season, which would see cash withdrawals," said VRC Reddy, treasury head of Karur Vysya Bank.
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