Indian Banks Urge RBI to Revert to Overnight Liquidity Tool, Suggest New Benchmark Rate
Indian lenders have recommended that the Reserve Bank of India (RBI) shift from its current 14-day variable rate repo tool to a fixed-rate overnight liquidity instrument, aligning with the need for real-time liquidity management amid 24-hour banking operations. According to sources familiar with the matter, banks believe the 14-day repo has become outdated and are pushing for a daily liquidity tool to manage short-term needs better.
The RBI held a meeting with select market participants on Thursday, ahead of its upcoming monetary policy announcement on April 9. The 14-day repo tool, in use since 2020, was originally intended to reduce dependency on the central bank by encouraging banks to predict liquidity needs more accurately. However, with the RBI having infused ₹6.4 trillion into the banking system since December and planning another ₹600 billion this month, market participants are calling for a more dynamic approach to liquidity management.
Lenders have also proposed that the RBI cut the cash reserve ratio (CRR) and shift the operative target of monetary policy from the current weighted average call rate to the newly introduced Secured Overnight Rupee Rate (SORR). Introduced in December as a proposed benchmark for overnight transactions, SORR is seen as a more accurate reflection of market conditions and could enhance the efficiency of monetary transmission.
Pic Courtesy: google/ images are subject to copyright
