RBI to Meet Bankers Next Week to Discuss New Liquidity Model

(Bloomberg) -- India’s central bank is set to meet lenders next week to discuss changes in its liquidity management framework so that borrowing costs are better anchored to the policy rate, according to people familiar with the developments.

The Reserve Bank of India is scheduled to meet bank economists on April 3 to take feedback on proposed revisions that include considering shorter-maturity repurchase operations, the people said, asking not to be named discussing private matters. The central bank’s main tool currently is a 14-day cash window. 

An internal central bank panel has reviewed the liquidity framework and a revised one could be announced in coming weeks, the people said. 

READ: India’s Cash Crunch Spurs RBI to Weigh More Liquidity Infusions

The discussions on the liquidity framework come at a time when the central bank has been cutting interest rates and injecting large amounts of cash into the financial system as it seeks to boost economic growth.  

The central bank may consider using repurchase operations of different maturities, including shorter-tenor ones, the people said. Pro-actively using overnight or other short-tenor variable rate repurchase operations is an option on the table, they said. The central bank did not immediately respond to an email seeking a comment on the matter. 

In a seeming step in that direction, the RBI announced indefinite daily variable rate repurchase operations in January, as it sought to quell a severe cash deficit in the system. 

Repurchase operations are a mechanism used by the RBI to provide short-term funds to banks. When the central bank wishes to drain excess funds from lenders it uses reverse repurchase operations. 

Since the introduction of the existing framework in February 2020, there have been several instances where banks’ overnight borrowing costs have sharply diverged from the RBI’s policy rate. This poses challenges for the transmission of the RBI’s rate changes to the broader economy. 

The RBI’s rate-setting panel will announce its next policy statement on April 9.

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