MUMBAI: The Reserve Bank of India is likely to meet with banks next week to discuss the key issues of liquidity in the banking system and developments in sovereign debt yields, which serve as benchmarks for pricing corporate borrowing.
“There are meetings scheduled on November 2 and November 3. The discussion points include the skewed liquidity distribution in the banking system and the reasons why some banks deploy excess liquidity at the RBI’s Standing Deposit Facility (SDF) and why some banks which are short of liquidity often have to take recourse to borrowing from the Marginal Standing Facility (MSF),” a person aware of the matter said, asking not to be named.
“The RBI’s plan regarding open market bond sales is also likely to come up for discussion. There is a lot of speculation in the market regarding the timing and the choice of securities that the RBI may use for bond sales,” another person said.
The meetings come at a time when the RBI is trying to find a solution to the liquidity conundrum that is baffling both the regulator and banks. The RBI is urging lenders to lend out surplus funds in the interbank call money market instead of parking them at the central bank’s absorption facility.
An email sent to the RBI seeking comment for the story remained unanswered till press time.
In an unexpected step, RBI Governor Shaktikanta Das said on October 6 that the central bank would hold open market bond sales to drain out excess liquidity in the banking system. The yield on the 10-year benchmark government bond has since climbed as much as 16 basis points to a seven-month high of 7.38%, inflating borrowing costs for the Centre, and corporates.
In the policy statement, Das had exhorted lenders with surplus funds to explore lending opportunities in the call money market instead of just parking them at the SDF.
The call money rate, which is the operating target of the RBI’s monetary policy, determines the overnight cost of funds for banks, and therefore broader borrowing costs in the economy. Skewed liquidity conditions often lead to sharp swings in the call rate.
Over the past few months, banks have pointed out that liquidity management has become far more challenging due to the rapid growth of 24×7 banking, which involves instant fund transfers. Banks have said that more funds need to be set aside as a precautionary measure in case sudden payment obligations lead to a shortfall in the share of reserves mandated to be set aside by the RBI.
ET reported earlier this month that banks had requested the RBI to tweak the daily cutoff timing deadline for computation of the cash reserve ratio, a move that could prevent large amounts of funds from being parked at the SDF as a precautionary measure.
Source: The Economic Times
The post RBI To Call Out Liquidity Skew With Bankers first appeared on Latest India news, analysis and reports on IPA Newspack.
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