RBI tweaks ecosystem to ease market liquidity

The central bank governor Shaktikanta Das, while announcing RBI’s monetary policy review said it will allow banks to move and borrow between the standing deposit facility (SDF) and marginal standing facility (MSF) during weekends and holidays from 30 December. This will be reviewed after six months.

“With regard to the standing facilities of the Reserve Bank under the LAF, we have noticed simultaneous high utilisation of both MSF and SDF by the banks. This was pointed out in the last monetary policy statement. We propose to address this situation and have decided to allow reversal of liquidity facilities under both SDF and MSF even during weekends and holidays with effect from 30 December 2023," said RBI.

Now banks can park money in SDF and borrow from MSF on holidays, but can reverse those transactions only on working days.

The SDF is a collateral-free liquidity absorption mechanism implemented by RBI with the intention of transferring liquidity out of the commercial banking system and into RBI.

“As the banking system is using both MSF and SDF window simultaneously due to heterogenous liquidity condition and some funding mismatches during weekend and holidays, RBI has allowed reversal of liquidity facilities under SDF and MSF even during weekend and holidays. This will help smoothen the money market operation of banks as well as be cost effective for banks as they will use only one window during weekend or holidays and save on spread between MSF and SDF, which is 50 bps," said Gopal Tripathi, head of treasury and capital markets, Jana Small Finance Bank

Banking system liquidity has been in deficit mode for the last few months, prompting banks to borrow heavily through the MSF window during October and November. Banks were also found to park large amounts under the SDF during this time. This tight liquidity has been due to rising cash demand during the festive season, government cash balances and RBI’s market operations.

That said government spending has picked up and system liquidity has eased.

“By December end, we expect liquidity to be tight due to tax outflows. However from January onwards, the situation will depend on extent of FX flows and government spending as election code of conduct will kick in. If the government is not able to spend significantly, then liquidity tightness can continue," said Neeraj Gambhir, group executive and head of treasury, markets and wholesale banking,

In the October policy RBI had noted that banks with surplus funds were not lending in the inter-bank call market and were instead passively parking funds in the SDF at relatively less attractive rates.

Meanwhile, on RBI increasing risk weights to contain unfettered growth of unsecured loans, RBI deputy governor Swaminathan J. said it is a preemptive measure to bring prudence and end any exuberance exhibited by certain lenders. “Effort was made over the previous three-four months by way of sensitizing the players to put adequate internal control measures to ensure that the risk buildup is avoided," he said.

Further, “as the market was not responding enough to that, we watched the data and based on the data we have taken certain measures," said Swaminathan.

Last month, RBI raised the risk weights assigned to unsecured consumer credit like personal loans and credit card dues, months after monitoring the situation and cautioning banks against going all out in lending to these categories.