The State of the Economy report of the Reserve Bank of India (RBI) on Thursday warned of asset price bubbles arising out of excess liquidity in the banking system due to weak credit standards, while commenting on its recent incremental cash reserve ratio (I-CRR) mandate. Went. Bank.

During the August review of monetary policy, the RBI mandated scheduled banks to maintain an additional 10 per cent CRR on the increase in their net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023. The I-CRR mandate came into effect from August 12 and the decision will be reviewed on or before September 8.

The report noted that some recent developments, including the massive withdrawal of ~2000 banknotes as deposits, have disproportionately expanded liquidity, creating some dissonance with the disinflationary stance of monetary policy, while interest rates have The period structure has hindered the transmission of policy impulses. Rates.

“The lack of liquidity also has implications for financial stability in the form of potential asset price bubbles and weakening of lending standards,” the report said.

The report, written by RBI staff including Deputy Governor MD Patra, said, “As the banking system engages in absorbing this excess liquidity in prudent credit expansion, it is necessary to prevent surplus liquidity from temporarily slipping through the cracks.” “

Also, the report states that the I-CRR decision will forfeit some of the surplus while leaving enough liquidity in the system for normal banking business.

The intention of the I-CRR mandate, which is said to be temporary, is to return the seized funds ahead of the advance tax outflow from the banking system and before the surge in demand for bank credit that typically characterizes the second half. year, it said.

In the context of retail inflation rising to a 15-month high in July, the report said, “The sensitivity of the economy to repeated shocks in prices of vegetables, especially before and during the monsoon, transportation Major reforms are needed in the perishable supply chains that cover networks, warehousing and storage technologies, and value addition processes that reduce the amplitude of these fluctuations.

“As the spike in inflation in June turned into July, the unprecedented shock in tomato prices spilled over to prices of other vegetables as well,” the report said.

Noting that core inflation moderated in July, the report said the phenomenon of supply shocks has not abated – “increase in vegetable prices has percolated through the first half of August”.

Accordingly, it added that headline inflation is expected to average above 6 per cent in Q2. In the August monetary policy review, inflation for the July-September period was estimated at 6.2 per cent.

The high-frequency food price data for August (up to 14th) showed that prices of cereals and pulses continued to rise in the month, the report said.

While edible oil prices continued to decline in July-August, tomato prices on an average have registered a further increase in August so far, although recent data indicate some moderation in prices. The prices of onion and potato also registered a gradual increase.

It added, “It is noteworthy that despite the sharp rise in inflation, stagflation risks remain low at the present time.”

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