October 29, 1999

Dear Sir,

Please refer to Governor’s Circular No MPD. BC. 190 / 07.01.279 /99-2000 dated October 29, 1999 enclosing a copy of the statement on "Mid -Term Review of Monetary and Credit Policy for the year 1999-2000". In this connection, we advise as under:

2. (a) Reduction in Cash Reserve Ratio (CRR)

Under Section 42 (1) of the Reserve Bank of India Act, 1934 all Scheduled Commercial Banks {excluding Regional Rural Banks (RRBs)} are, at present, required to maintain with the Reserve Bank of India a Cash Reserve Ratio (CRR) of 10 per cent of the Net Demand and Time Liabilities (NDTL) (excluding liabilities subject to zero CRR prescription). In the light of the macro-economic and monetary policy developments reviewed, it has been decided to reduce the CRR. Accordingly, the CRR to be maintained by the Scheduled Commercial Banks (excluding RRBs) will be reduced by one percentage point from the present level of 10 per cent to 9 per cent of NDTL in two installments as set out below:

(b) Exemptions from Incremental Cash Reserve Ratio (CRR) on Liabilities under Foreign Currency Non Resident (Banks) Accounts (FCNR (B)):

At present, under Section 42(1A) of the Reserve Bank of India Act, 1934 all the Scheduled Commercial Banks (excluding Regional Rural Banks) are required to maintain an incremental Cash Reserve Ratio (CRR) of 10 per cent on increase in liabilities under Foreign Currency Non Resident (Banks) Scheme over the level as on April 11, 1997. It has now been decided that with effect from the fortnight beginning November 06, 1999 the liabilities under FCNR (B) will be exempted from the maintenance of incremental CRR of 10 per cent.

3. Copies of the relative notifications DBOD No BC.110 /12.01.001/99-2000, DBOD No.BC.111/ 12.01.001/99-2000 both dated October 29, 1999 are enclosed.

4. It may be reiterated that in view of the multiple prescriptions of CRR on different categories of liabilities including zero prescription of CRR on certain liabilities , as stipulated under the law , effective CRR maintained by Scheduled Commercial Banks on total Net Demand and Time Liabilities should not be less than 3 per cent.

5. Change of the procedure for calculation of CRR:

At present all the Scheduled Commercial Banks are required to maintain the prescribed Cash Reserve Ratio during the fortnight based on the NDTL obtaining on Friday immediately preceding the fortnight as per the instructions contained in para 3 of our circular DBOD No.leg BC.23/46A-85 dated March 05, 1985. In order to improve the cash management by banks, as a measure of simplification, it has been decided to introduce a lag of two weeks in the maintenance of stipulated CRR by banks. Thus, the prescribed CRR during a fortnight will be maintained by every Scheduled Commercial Bank based on its NDTL as on the last Friday of the second preceding fortnight. This change in the procedure for calculation of reserve maintenance will be effective from the fortnight beginning from November 06, 1999. It is clarified that under the revised procedure, the banks shall calculate Cash Reserve Ratio for the fortnight beginning from November 6, 1999 based on the NDTL as on reporting Friday, October 22, 1999.

6.Flexibility in the treatment of CRR :

Normally, banks maintain minimum cash in their own vaults since it is an idle asset, without the benefit of earning any interest. In the context of date change at the turn of the century, in order to meet any additional demand for bank notes as a contingency, banks may have to keep larger vault cash for meeting their business transactions. At present such cash in hand with the bank though an eligible asset for SLR , is not counted for CRR requirements. To facilitate banks to tide over the contingency during the millennium change , it has been decided to treat cash in hand maintained by the banks for compliance of CRR for a limited period of two months commencing from December 1, 1999 to January 31, 2000. It is clarified here that the cash in hand which will be counted for CRR purposes, during the above period cannot be treated as eligible asset for SLR purposes simultaneously. A copy of the relative notification DBOD No.BC. 112/12.01.001/99-2000 dated October 29, 1999 is enclosed.

7. As already indicated, for operational convenience, the maintenance of CRR by banks is being lagged by two weeks. As such, for maintaining CRR during the fortnight beginning January 1, 2000, the NDTL base would be December 17, 1999. With the leverage of two weeks available, banks should not have any problem in complying with the CRR requirement around the century date change. Nevertheless, any bank that expects a special problem in meeting its CRR obligations at the end of the year can approach the RBI for appropriate relaxation/assistance.

8.Please acknowledge receipt.

Yours faithfully,

(N.K.Sarkar )
Chief General Manager.
Encl: 3

Endt . DBOD No /12.01.001/ 99-2000 of date.

Copy forwarded for information and necessary action to :

1. The Deputy General Manager, Department of Banking Operations and Development Reserve Bank of India, All Regional offices,
2. The General Manager, Department of Banking Supervision, Reserve Bank Of India, all Regional Offices,
3. The Chief General Manager, Department of Banking Supervision, Reserve Bank of India, Central Office, Mumbai.
4. The Adviser- in – Charge, Department of Economic and Statistical Analysis & Computer Services, Reserve Bank Of India, Central Office, Mumbai.
5. The Adviser- in – Charge , Department of Economic Analysis & Policy, Reserve Bank of India, Central Office , Mumbai.
6. The Adviser- in – Charge , MPD , RBI , Central Office , Mumbai - 400 001 with reference to Governor’s letter No MPD BC.190 /07.01.279 / 99-2000 dated October 29, 1999.