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Informist, Thursday, Mar. 27, 2025

 

NEW DELHI – The Reserve Bank of India has invited market participants for a meeting next week to collect feedback on a new liquidity management framework, according to four people aware of the matter. The meeting is scheduled for Apr. 3, days before the Monetary Policy Committee begins its three-day meeting on Apr. 7.

 

"We'll have to see what they have in mind and we are still figuring out what suggestions to give," one of the persons said on the condition of anonymity. "But the RBI has not indicated what changes are likely and by when they want to implement them."

 

The meeting comes in the wake of a massive infusion of durable liquidity by the RBI in recent months, starting with the Cash Reserve Ratio cut in December, as the central bank's interventions in the foreign exchange market in the face of a falling rupee starved the Indian banking system of rupee liquidity. At the same time, the RBI has also raised concerns about the functioning of money markets in recent months.

 

In its most recent State of the Economy article, published on Mar. 19, the central bank's staff said the "co-existence of deficit liquidity conditions and substantial fund placements under the SDF (Standing Deposit Facility) suggests the asymmetric distribution of liquidity within the banking system as well as increased liquidity preference on the part of banks".

 

A new framework to manage liquidity would be the fourth such system over the last decade or so. The current framework 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.

 

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, sources said, 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. As such, the central bank in December proposed the introduction of a new benchmark rate called the Secured Overnight Rupee Rate, or SORR, following the recommendations of the committee on the MIBOR benchmark. Financial Benchmarks India Ltd has been asked to "take the proposal forward", former governor Shaktikanta Das had said on Dec. 6.

 

Sources also said the RBI may revert to overnight liquidity management windows to better manage overnight rates or reduce the tenure of its main operation to seven days due to the market's reluctance to park funds with or borrow from the central bank for 14 days. As part of its recent liquidity measures amid a sharp tightening of financial conditions, the RBI has been conducting daily variable rate repo operations since Jan. 16.  End

 

Reported by Aaryan Khanna and Pratiksha

Edited by Vandana Hingorani

 

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