The Reserve Bank of India (RBI) said on 21 March 2007 that banks can utilise funds accessed from its daily money market operations for interbank lending but should not be using the funds for customer credit.
The central bank warned in January that using its liquidity adjustment facility (LAF) window for lending on to customers should be avoided and it repeated the stance again.
“It is clarified that the intent of this advice is that the recourse to LAF by market participants should not be persistent in order to fund balance sheets for credit needs of customers,” it said in a statement.
“But banks can utilise the funds borrowed under this facility for inter-bank lending.”
Analysts said the statement once again highlighted the central bank’s concern about scorching credit growth. Bank lending has been growing at 30% a year, much higher than the RBI’s projection of 20% .
Governor Yaga Venugopal Reddy warned in November 2006 that banks must maintain deposit growth alongside credit growth and if they approached the central bank for liquidity support, it would be expensive and would not be on an “assured basis”.
Since then, the RBI has stepped up monetary tightening, raising its short-term lending rate in January and lifting the cash reserve requirement twice since mid-December.
It is striving to keep cash conditions in the banking system tight, as well to keep inflation in check, but has been lending normally at the repo window, where the rate is 7.5% .
The interbank overnight cash rate, the rate at which banks lend to each other, normally hovers around 6-7%. But on 21 March quotes shot to 70% , the highest in more than 10 years, as a result of tax outflows from the banking system for the end of the fiscal year on March 31.
“They want banks to use money availed in the repo auction to lend to other banks, which may be short on cash,” Partha Mukherjee, treasury head at UTI Bank, said.
“This would bring down the call money rates.”