Mumbai: As banks park a record amount with the Reserve Bank of India (RBI) in the aftermath of the demonetisation of high-value currency notes, the central bank may have to look at new collateral to offer against these deposits.
As of Tuesday, banks had parked Rs4.3 trillion in reverse repo operations under the liquidity adjustment facility wherein RBI accepts money from banks by offering government securities as collateral.
RBI said on Monday the Indian banking system had collected deposits worth Rs5.12 trillion as of 18 November. On Wednesday, attorney general Mukul Rohatgi told the Supreme Court that banks had received deposits worth Rs6 trillion after Rs500 and Rs1,000 banknotes ceased to be legal tender.
Considering the fact that deposits have been consistently rising—the centre expects about Rs15 trillion worth of deposits to come in before 30 December—the RBI’s Rs7 trillion worth government securities kitty is likely to come under pressure.
This is the highest liquidity absorption by RBI ever, according to India Ratings and Research Pvt. Ltd, easily beating the earlier record of Rs1.7 trillion in May 2009.
In a report released on Wednesday, India Ratings said the best way for the banking regulator would be to issue cash management bills against the new deposits that are flowing into the banking system.
“In Ind-Ra’s assessment, sterilization through the issuance of cash management bills (CMB) is likely to be preferred over other structural measures, namely a hike in the cash reserve ratio (CRR) or resorting to the use of the market stabilization scheme (MSS), since the sustainability of such high deposits remains uncertain,” analysts at India Ratings said in a statement on Wednesday.
CRR is the proportion of deposits that banks have to park with the central bank. RBI issues MSS securities to mop up excess liquidity from the banking system.
“The sterilization will ensure stability in the money market, in sync with the central bank’s key objective of ensuring financial market stability,” India Ratings said.
CMBs, according to India Ratings, stand a better chance of being picked as an option to manage the short-term liquidity surge due to the short duration of the underlying security, which is less than 91 days, and existing secondary market, among other factors.
“The issuance of CMBs will limit the softening of yields, especially on the shorter end of the curve,” India Ratings said. Traditionally, CMBs are issued to enable the government to tide over temporary liquidity mismatches.
Other options available with RBI could be a hike in the CRR, introducing provisions under the MSS, intervention in the foreign exchange market and opening an uncollateralized window of liquidity absorption, the rating agency said.