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Informist, Wednesday, May 21, 2025

 

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--Sources: RBI met bankers Wed to discuss liquidity management framework
--Sources:Bankers split on potential liquidity framework changes at RBI meet
--Sources: Most bankers suggested RBI return to overnight liquidity mgmt ops
--Sources: Bankers suggested RBI reintroduce fixed rate repo, reverse repos
--Sources: Bankers prefer weighted avg call rate as RBI policy operating aim
--Sources:Bankers asked RBI to mull collateralised mkt rate for operating aim
--Sources: Bankers suggested RBI lower daily maintenance level of CRR

 

By Shubham Rana, Aaryan Khanna, and Pratiksha

 

NEW DELHI – Banks have asked the Reserve Bank of India to allow more flexibility in the maintenance of the daily Cash Reserve Ratio at a meeting held by the central bank Wednesday to discuss the future of the liquidity management framework, multiple people who attended the meeting said.

 

This was the second formal meeting between the RBI and bankers on the liquidity management framework. The RBI had earlier met bankers on Apr. 3 to discuss review of the liquidity management framework, which dates back to February 2020, with 14-day variable rate repo and reverse repo operations acting as the main instruments to manage temporary liquidity mismatches. RBI officials, including new Deputy Governor Poonam Gupta and Executive Director Radha Shyam Ratho, attended Wednesday's meeting, Informist has learnt.

 

The RBI called the meeting to discuss the efficacy of weighted average call rate as the main monetary policy target, continuation of variable rate repo and reverse repo auctions as against fixed rate overnight repo and reverse repo operations, and the daily CRR maintenance level, people who attended the meeting told Informist on the condition of anonymity as the discussions were confidential.

 

At the meeting, bankers suggested that the RBI reduce the requirement of minimum daily CRR balance maintenance to as low as 80% of the fortnightly requirement from the current 90%, people who attended the meeting said. The RBI had previously reduced this level to 80% for a limited period at the start of the COVID-19 pandemic in March 2020.

 

"People were split on almost all topics, including the need to return to overnight liquidity management operations," a bank official who attended the meeting said.

 

Most bankers asked the RBI to return to overnight liquidity management operations, rather than its main tool being the 14-day operation in the current framework. The central bank has conducted the fortnightly operation only once since Mar. 7. While several bankers were comfortable with variable rate repo and reverse repo operations being the norm, like under the current framework, they expressed a need for a fixed rate overnight window for a small percentage of banks' net demand and time liabilities.

 

Some bankers suggested that the RBI introduce a specific repo window at around 2200 IST, which would allow lenders to manage fund requirements without having to dip into the marginal standing facility, which has a higher borrowing rate, another banker who attended the meeting said.

 

Another topic where bankers differed was on the efficacy of the weighted average call rate as the monetary policy's main policy operating target. Some bankers said they prefer the weighted average call rate as the operating target of monetary policy, while others suggested that the RBI consider collateralised market rates for the operating aim. A synthetic blended rate of the two, based on different weightages, was also suggested.

 

"Several people suggested SORR (secured overnight rupee rate) as the replacement for WACR (weighted average call rate), while others suggested some form of blended rates," the second banker said. "RBI officials sought suggestions on other rates which have more volume and can be tracked tick-by-tick on screen, which would be something like TREPS (triparty repo rate)."

 

Bankers say changes to the liquidity framework are likely as the weighted average call rate--the operating target of monetary policy--has over the years ceased to be representative of money market rates with the call market's share in total money market volumes falling to just 2.3% in 2023-24 (Apr-Mar) from 21.5% in FY12. The central bank in December proposed the introduction of a new benchmark rate called the Secured Overnight Rupee Rate, or SORR, as an alternate benchmark based on secured funding rates.

 

A third bank official, who was part of the meeting, said that while the RBI did not indicate any future course, the central bank could bring out a draft circular proposing changes to the liquidity management framework. Another banker said the RBI can also form a committee to look into the future of the framework, although there was no such indication from the central bank on Wednesday. One official said it is likely the RBI may hold more meetings on the liquidity framework.  End

 

Edited by Saji George Titus

 

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