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Informist, Saturday, Dec. 27, 2025

 

By Aaryan Khanna

 

NEW DELHI – For the first time in over four decades, banks did not have to worry about their cash balances down to the decimal point on Friday. Dec. 26 was the first Friday where banks did not have to report and adhere to statutory requirements for cash balances after the Reserve Bank of India's regulatory overhaul that junked the fortnightly system introduced in 1985.

 

Under the amended regulation, the definition of "fortnight" has been changed from a Saturday-to-Friday cycle to a clearly defined two-part monthly period--either the 1st to the 15th of each month or the 16th to the last day of the month, both days inclusive. As a result, all cash reserve ratio and statutory liquidity ratio maintenance and reporting obligations must now conform to this new fortnightly structure, the RBI had said in notifications earlier this month. 

 

"It's an easier system where banks don't have to figure out when the reporting Friday is and in this case, I don't have to worry about maintaining liquidity both for Friday and then for the three days until the end of the quarter," the head of asset-liability management at a private-sector bank said. "This is more of an operational change that the RBI has made, which didn't require a push from either banks or the regulator." The banker said there was no discussion between banks and the regulator in a common forum before the change was made.

 

Most banks have been maintaining more securities eligible for the statutory liquidity ratio computation for years now, making the change irrelevant on that front. Instead of having the fortnight end Friday, banks have to maintain an average daily cash balance of INR 7.45 trillion with the RBI in the period between Dec. 16 and Dec. 31. Despite the change, money market rates remained under pressure due to the prevailing liquidity deficit in the banking system.

 

The weighted average call rate – the operating target of monetary policy – was 5.46% Friday compared with 5.47% in the previous session, remaining above the policy repo rate of 5.25%. The weighted average rate in the broader tri-party repo market was 5.25%, down from 5.31% Wednesday. The RBI's net liquidity injected into the banking system – a proxy for the liquidity deficit – was INR 845.24 billion Thursday, the most since Sept. 23 and higher than INR 810.65 billion Wednesday. Money markets were shut on Thursday for Christmas.

 

"Overall, there is not going to be too much of a difference in rates. I don't think it was meant to impact money markets at all," a senior treasury official at a state-owned bank said. "It just simplifies the reporting needs where you have to now maintain it (cash balance) on fixed dates every month, which should help with operational clarity."

 

While banks had to maintain their balances to meet regulatory thresholds only on the reporting Friday, they internally reported their cash and liquid security holdings and ratio maintenance to the RBI at the end of every month, dealers said. Instead of remaining internal, the shift to public reporting and maintenance of the cash reserve ratio may lead to more real-time clarity and publication of banks' regulatory compliance at the month-, quarter-, and year-end.

 

Most bankers said the changes also leave enough flexibility for banks to manage assets and liabilities. On a daily basis, banks can maintain cash balances with the RBI as low as 90% of their cash reserve ratio maintenance needs, provided their daily average remains above the regulatory threshold for the new 15-day reporting period. However, some see the additional regulatory scrutiny on cash at month-ends spilling over to higher money market rates at the quarter-end and year-end, when banks' borrowing needs typically spike.

 

"The only big change is that every quarter-end is going to see a lot of pain for everyone, including large PSUs (state-owned banks)," a dealer at another private-sector bank said. "This will reduce the flexibility that we had earlier, where I could have averaged out my cash reserve ratio (needs) in the first week of January, now I will have to manage it when credit demand is at a peak."  An immediate example of such a distortion may occur at tne end of this month on Wednesday, the dealer said.  End

 

Edited by Tanima Banerjee

 

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