Digital or physical, cash is not king for reserve ratio

Mumbai: India’s central bank digital currency pilots in wholesale and retail segments have largely met with success since last year, but some banks have recently hit a bump as statutes do not permit the money to be used for meeting the Cash Reserve Ratio (CRR) requirement.

A person aware of the development told ET that according to current classifications, banks’ holdings of the CBDC could be eligible for other mandatory reserve requirements but not the CRR.

“It (the CBDC) is like cash. As per the statute, cash is not part of CRR. It definitely will be counted for SLR (Statutory Liquidity Ratio) like any cash,” the person said. Under the CRR, the RBI impounds deposits of banks curtailing their ability to lend which has a multiplier effect. The person here refers CBDC to be equivalent to currency and not deposits for the calculation of CRR.

Over the past couple of weeks, some banks had requested permission to utilise a portion of CBDC holdings to meet the CRR requirement, sources said.

An email sent to the Reserve Bank of India (RBI) asking for a comment on the matter did not receive a response by press time. The RBI has stated that the CBDC is essentially the digital form of the fiat currency.

According to RBI norms, the CRR is a percentage of demand and time liabilities – a proxy for deposits – that banks must keep with the central bank as part of a measure that ensures monetary stability. At present, the CRR is at 4.50%.A bank’s demand liabilities include amongst others current deposits, the demand liabilities portion of savings bank deposits, cash certificates and cumulative or recurring deposits. Time liabilities, on the other hand, include fixed deposits, deposits held as securities for advances not payable on demand and the time liabilities portion of savings bank deposits.The SLR is the portion of net demand and time liabilities that a bank must park in cash, gold or approved securities – mostly government securities. At present, the SLR is at 18%.

Year-long Pilot
In October 2022, the RBI launched the wholesale pilot for CBDC which entailed banks’ transactions in government bonds using the digital currency. Nine banks had been identified for participation in the pilot including State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.

The next month the central bank announced the pilot for the retail CBDC covering select locations in closed user groups involving participating customers and merchants. The e-rupee would be in the form of a digital token representing legal tender and distributed through banks, the RBI had said.

Earlier this year, RBI Deputy Governor T Rabi Sankar had said that the central bank was aiming for 10 lakh CBDC transactions per day by the end of December.

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