Banks will have to park the entire incremental deposits they get from the money inflow in the form of deposits through deposit of old currency notes after the demonetization move announcement.
On Saturday, the Reserve Bank asked banks to maintain an incremental CRR (cash reserve ratio) of 100% starting November 26, 2016.

CRR is the part of deposits that banks have to park with the RBI as cash. It is stored in bank vaults or parked with the RBI. RBI kept the overall CRR unchanged at 4% of the total outstanding NDTL (net demand and time liabilities).

“This is intended to absorb a part of the surplus liquidity arising from the return of the specified (old 500 and 1000 rupee) bank notes to the banking system, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy,” RBI said in a statement.

Demand liabilities are deposits payable on demand (like savings deposits) while time liabilities are those which are payable after a fixed period of years.

The new measures will be applicable on the increase in deposits (NDTL) between September 16, 2016 and November 11, 2016.
This will suck out approximately Rs 3.5 lakh crore worth of deposits.

Traders said bond market yields could rise 8-10 bps on Monday, given that the RBI move would deprive the key source of funding seen in the past two weeks, while banking shares would likely take a hit.

An economist with a top private bank said, “This will increase costs for the banks as they do not get interest on such deposits (but have to pay at least 4% interest to their customers. RBI has done this to ease the liquidity management.”

Experts say this is done to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool used for controlling money supply in an economy.

RBI said the move is “intended to be a temporary measure” and will be reviewed on December 9 or earlier.

“The Reserve Bank has separately revived the Guarantee Scheme to enable deposit of SBN (specified bank notes) balances at the Reserve Bank or at currency chests and get immediate value. This measure should also facilitate banks’ compliance with the incremental CRR,” it further said.

EquityPandit Outlook: This is a negative news for Banking Sector as it is a pure loss to banks. This announcement may force banks to see a downfall on Monday.