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Informist, Wednesday, Apr. 9, 2025

 

By Siddharth Upasani

 

MUMBAI – Governor Sanjay Malhotra on Wednesday promised "sufficient" and "adequate" systemic liquidity in the ballpark of 1% of banks' net demand and time liabilities to ensure policy transmission. Clearly, Wednesday came too soon for the Reserve Bank of India to unveil its new liquidity framework considering it has in recent days discussed the matter with bankers and economists. As Malhotra put it, consultations are ongoing over whether the extant practice of mainly looking at the overnight money market rate should continue for policy transmission or whether the RBI should be "targeting something else".

 

Until the new framework is put in place, the market has to work with what exists. The problem is that the current framework is not exactly working well. As such, Malhotra's stated objective of transmitting changes in the policy rate to the overnight rate, which will "hopefully" then be reflected in short, medium, and long term interest rates may not occur smoothly.

 

As Deputy Governor T. Rabi Sankar noted on Wednesday, "call volumes have come down significantly compared to other overnight volumes". Trades in the call market make up just 2% of those in the money market now, down from 20% or so a decade ago. It is well known that the call rate does not reflect funding conditions--the weighted average rate on Wednesday was 5.91%, while those in the much-larger and collateralised triparty and market repo segments were 5.76% and 5.86%, respectively.

 

That the RBI is intent on keeping the banking system flush with liquidity is independent of the underlying framework and operating target--weighted average call rate or the proposed Secured Overnight Rupee Rate, or SORR. As an analysis in the latest edition of the Monetary Policy Report, also released Wednesday, noted, "providing sufficient liquidity has a more pronounced impact on spreads, especially during uncertain times". And the RBI has been at pains to highlight how uncertain the global economic landscape has become in light of the US' tariff war.

 

It is no surprise then that economists expect as much as INR 4 trillion of liquidity to be infused in 2025-26 (Apr-Mar). Aiding in this endeavour will be the transfer of RBI's surplus to the central government, which will then spend the same. Set to be transferred in late May, the surplus for FY25 is expected to be in excess or INR 2 trillion, thanks to the massive dollar sales in the last financial year. Liquidity pressures will also need to be alleviated once the RBI unwinds its large forward positions, which stood at a net short $78.69 billion as at the end of February.

 

Using Malhotra's ballpark figure of 1% of banks' net demand and time liabilities, the RBI will be looking to maintain a liquidity surplus of close to INR 2.5 trillion. While that will definitely be welcomed, complete clarity and operational guarantees will only come from the new liquidity management framework, whenever it is announced.  End

 

US$1 = INR 86.69

 

Edited by Akul Nishant Akhoury

 

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