Bankers watch for clues regarding the Reserve Bank of India's liquidity strategy

6 Jun 2023 , 02:37 PM

Even though policy interest rates are likely to remain steady, the Reserve Bank of India's policy review on Thursday would be widely monitored for clues on its approach to liquidity.

To avoid the danger of a potential shortage, Indian banks have been reluctant to park their excess liquidity with the Reserve Bank of India (RBI) for extended periods of time. The RBI would want to see this behaviour change because excess money in the system might potentially lead to inflation.

After the banking liquidity surplus increased to 2.4 trillion rupees ($29.06 billion) last week, the RBI offered to withdraw 2 trillion rupees through 14-day variable rate reverse repo auctions, the preferred method for absorbing liquidity for longer durations. However, only one-fourth of that sum was parked by banks.

On Monday, it was revealed that a second VRRR auction for 1 trillion rupees would take place, this one lasting only four days.

There was a 2.3 trillion rupee liquidity surplus on Monday.

In addition to erratic government expenditure and FX market involvement, a recent decision to withdraw notes denominated in 2,000 rupees was cited as one of the factors contributing to the volatility by a treasury official at a major private bank who talked to Reuters.

The yield on 91-day Treasury bills is still above 6.75%, while the rate on commercial debt from state-run businesses is around 6.95%.

According to the banker who was quoted above, some banks are also hesitant to use the central bank's marginal standing facility (MSF), which provides money if banks run out of liquidity. This is because their boards and auditors frequently criticize the usage of the expensive fall-back facility.

The private bank executive suggested that communication from the central bank to 'de-stigmatize' the MSF window will be beneficial.

The SDF and MSF rates are currently 6.25% and 6.75%, respectively, while the repo rate is currently 6.50%.

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