Mumbai, Jan 18 (The Street Press India) – Indian banks are asking the Reserve Bank of India (RBI) to make it easier for them to handle money as the overnight cash rates have been higher than the main policy rate for more than five months. Treasury officials are planning to share their ideas with the RBI before the upcoming policy meeting next month.
Lenders are optimistic that with anticipated relief in inflation, the central bank might relax liquidity conditions and even create a surplus to alleviate the impact of high rates, which is causing challenges for them. These recommendations were presented to the industry body, Fixed Income Money Market and Derivatives Association of India (FIMMDA), on Wednesday by the banks.
FIMMDA officials were not immediately accessible for comments and did not reply to a Reuters inquiry. The RBI increased control over banking liquidity in mid-2023 to curb inflationary pressures, following a surplus of cash in banks caused by the withdrawal of 2,000-rupee currency notes.
The central bank’s rate-setting panel had increased the benchmark policy rate by 250 basis points from May 2022 to February 2023, reaching 6.50%. This move aimed to unwind the pandemic-era stimulus and control inflation. Currently, India’s banking system faces a liquidity deficit of around 2 trillion rupees ($24 billion), causing the weighted average interbank lending rate to hover close to 6.75%. In response to the tightening liquidity, the RBI ceased withdrawing cash from the banking system through variable rate reverse repos.
Currently, the central bank lends cash to banks through intermittent auctions, such as a three-day, 500-billion-rupees variable rate repo held on Fridays. Treasury officials anticipate an increase in both the amount and frequency of these repos in the future. A senior treasury official at a state-run bank emphasized the scarcity of durable liquidity in the market, suggesting that the RBI will need to address this by regularly conducting variable rate repos.
“We think that the 14-day VRR will be the preferred liquidity infusion tool for the RBI in this quarter.” The next policy decision from the RBI rate-setting panel is scheduled for February 8.
($1 = 83.1176 Indian rupees)