Reserve Bank to pay interest on CRR balances

The Reserve Bank of India (RBI) today said it will pay pay interest @ 3.5% for the period June 24, 2006 to December 8, 2006; 2% for the period December 9, 2006 to February 16, 2007; and 1% from February 17, 2007 till further notice on the cash reserve ratio (CRR) maintained by banks.

Following is the press release issued by RBI a short while ago:

Reserve Bank of India (Amendment) Act, 2006: Provisions Relating to CRR 

The Reserve Bank of India (Amendment) Act, 2006 was enacted in June 2006. Consequent to the enactment, the Reserve Bank, vide its press release and circulars dated June 22, 2006 decided (i) to continue the status quo on the rate of cash reserve ratio (CRR) to be maintained by Scheduled Banks and the extant exemptions; (ii) to remove the statutory minimum CRR maintenance requirement of 3 per cent; and (iii) hence not to pay any interest on the eligible CRR balances maintained by scheduled banks with effect from the fortnight beginning June 24, 2006.

The Extraordinary Gazette notification No.S.O.21(E) dated January 9, 2007 has notified January 9, 2007 as the date on which all the provisions, except Section 3, of the Reserve Bank of India (Amendment) Act, 2006 shall come into force.

Section 3 the Reserve Bank of India (Amendment) Act, 2006 provided for the removal of:

[by amendment of sub-Section 42(1A)] the ceiling and floor on the CRR to be prescribed by the RBI having regard to the need for securing monetary stability in the country; and

[by omission of sub-Section 42(1B)] the provisions for interest payment on eligible CRR balances [i.e., the amount of reserves between the statutory minimum CRR and the CRR prescribed by the RBI.

Since the above Section 3 is not notified so far, in consultation with Government it has been decided:

(i) that for prescription by the Reserve Bank, the minimum CRR level of 3.0 per cent and the maximum CRR level of 20 per cent of total of banks' demand and time liabilities remain as per the extant provisions of Section 42(1) of the Reserve Bank of India Act, 1934;

(ii) to exempt, under the powers conferred on the Reserve Bank under sub-Section 42(5)(c) of the Reserve Bank of India Act, 1934, such banks from payment of the penal interest who have breached the statutory minimum CRR level of 3.0 per cent during June 22, 2006 to March 2, 2007 on account of CRR exemptions reckoned for computation of demand and time liabilities for CRR; and

(iii) to pay interest on eligible CRR balance during the interregnum in the following manner consistent with the monetary policy stance and measures at relevant periods of time:

(a) pay interest @ 3.5 per cent for the period June 24, 2006 to December 8, 2006;

(b) pay interest @ 2.0 per cent for the period December 9, 2006 to February 16, 2007;

(c) pay interest @ 1.0 per cent from February 17, 2007 until further notice.