Economic Affairs Secretary Shaktikanta Das on Monday said the reason behind the increase in Cash Reserve Ratio (CRR) as it was necessary, in the context of excessive liquidity post demonitisation, to "arrest" the possible increase in volatility in currency markets and soften the declining bond yields that we were experiencing in India so that there is not an unusual outflow of hard currencies from India.
"The increase in CRR is a part of the liquidity management strategy used by the Reserve Bank of India (RBI). It has become necessary in the context of excessive liquidity in the system. When there is excessive liquidity it adds to volatility in the currency markets," Das told media here.
CRR is a specified minimum fraction of the total deposits of customers where banks have to hold reserves either in cash or as deposits with the Reserve Bank of India
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Das further pointed out that the G-Sec rates and bond yields in India were going down whereas it was going up in all the other emerging markets in line with the US treasury bills and bond rates.
"That was mainly happening because of excess liquidity that we had in the system and when the bond yields go down there is a tendency on part of the people to take the money out into high yielding areas, especially the US, so therefore its impact was also perhaps being felt in the currency markets," he added.
Das said that the RBI has already given a proposal for increasing the Market Stabilization Scheme (MSS) limit and it's under the consideration of the government.
The securities issued under the MSS, termed as Market Stabilization Scheme (MSS) Securities/Bonds, are issued by way of auctions conducted by the RBI and are done according to a specified ceiling mutually agreed upon by the GoI and the RBI. They possess attributes of existing Treasury-Bills/Dated Securities, and are included as a part of the country's 'internal Central Government debt'.
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