The Reserve Bank of India has raised the cash reserve ratio of banks by 0.5 per cent to 5 per cent of their net demand and time liabilities (NDTL), in two stages beginning fortnight September 18.

The CRR would go up to 4.75 per cent from 4.5 per cent of NDTL effective fortnight beginning 18 and subsequently to 5 per cent from fortnight beginning October 2, RBI said in a release in Mumbai on Saturday.

The decision has been taken on a review of current liquidity conditions in the financial system, it added.

RBI said banks, with fortnight beginning September 18, would be paid an interest of 3.5 per cent per annum on their eligible cash balances maintained with the central bank under CRR requirement as against the current practice of payment at the bank rate (6 per cent).

The payment of interest on monthly basis would continue as at present, it said.

It was indicated in the annual policy of 2002-03 that RBI would continue to pursue its medium-term objective of reducing CRR to its statutory minimum of 3 per cent, while retaining the option to use the CRR in both directions for liquidity management as and when essential, in addition to other instruments.

On remuneration of eligible cash balances under CRR, RBI said their Internal Group on Liquidity Adjustment Facility (December 2003) had recommended that with scaling down of CRR coupled with a decline in interest rate structure and increasing liquidity needs, the degree to which CRR had been impacting banks as an implicit taxation earlier is considerably less in recent period.

Accordingly, the remuneration of eligible cash balances at the Bank Rate was no longer justifiable and remuneration of CRR, if any, be delinked from the Bank Rate and placed at a rate lower than the repo rate.