Banking stocks rallied on Friday (September 8) after the Reserve Bank of India (RBI) decided to discontinue the incremental cash reserve ratio (ICRR) in a phased manner. As of 2:45 pm, the Nifty Bank and the S&P BSE Bankex were trading higher at 45,195.5 and 50,294.59, respectively.

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On the NSE, except for IDFC First Bank, all the banking stocks surged from 0.31 per cent to 2 per cent. IDFC First Bank was down 0.52 per cent.

ICRR was imposed by the RBI on banks (10 per cent) from August 12 to absorb the surplus liquidity created in the system due to multiple factors, including the return of Rs 2,000 notes.

According to recent reports, about 93 per cent of Rs 2,000 notes have been collected.

ICRR impact 

According to Zee Business research, due to the imposition of ICRR in August, the Treasury yield increased by 15 to 20 basis points (bps). There has been a decrease in liquidity, and thus, some banks have even increased deposit interest rates.

Since the RBI has decided to discontinue the measure in a phased manner, the banks will have additional liquidity now, which can have an impact on loan rates, and there may be a slight decrease in yields. Conversely, if RBI had continued with the measure, the maximum ICRR would have been applicable until the next policy, and there could have been a shortage in liquidity, which would have pushed the deposit interest rate higher.

ICRR and inflation

According to Zee Business research, if the ICRR is removed or decreased, it would indicate that inflation is under control.

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