To see how one of the RBI liquidity squeeze changes will impact banks starting Saturday, see the chart of how banks have maintained cash balances as a percentage of the CRR required:

image

You can see here that within a fortnightly window, banks tend to maintain a higher than required cash balance (Cash to CRR is greater than 100%) in the first few days. Towards the end, they taper off and keep low balances. This is rational because CRR balances don’t earn banks any interest – they could take the excess and give it in as reverse repo to the RBI and earn 6.25% on it.

However, this flexibility has been limited to a floor of 70%. You couldn’t go below 70%.

Since this is an aggregate of about 85 banks, it’s likely some banks hit that floor of 70%, which is why their average over the  fortnight might be higher than required. Public sector banks might not have the inclination to optimize such cash balances either. (given their other commitments and lack of incentive and lack of real competition)

Now, though, we will see a change. Come Saturday, the above line can’t dip below 99%. Expect it, then, not to go up beyond a point (about 105%). Banks will now want to keep lesser and lesser money “idle”. With liquidity becoming expensive, banks can earn income by placing money in Call markets, CBLO or such.

(Some of you have asked: how can a bank know exactly how much to put in CRR if their deposits are changing daily? Answer: your CRR today is based on your deposits/NDTL two weeks ago, a number that is pretty much written in stone because it is the past.)

Now, tell them about it: