RBI may cap reverse repo rate to ensure liquidity translates into credit

The central bank had earlier on March 27 given effect to a 90-bps cut in the reverse repo rate to 4 per cent
The Reserve Bank of India (RBI) is not in favour of banks parking huge amounts of funds at its reverse repo window, and may not hesitate to impose a cap on it to ensure systemic liquidity translates into credit for industry.

“While it is for the banks to decide whom they want to lend, it can’t be that they continue to park huge amounts at the reverse repo window,” said a source.

This is, in effect, the sharpest follow-up to RBI Governor Shaktikanta Das’ statement last Friday, drawing attention to the Rs 6.9 trillion being absorbed under its reverse repo operations, and a systemic liquidity surplus averaging Rs 4.36 trillion during March 27-April 14, 2020. And that the slash in the reverse repo rate by 25 basis points (bps) to 3.75 per cent “is to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy”.

The central bank on March 27 had cut the reverse repo rate by 90 bps to 4 per cent. In the minutes of the Monetary Policy Committee’s March meeting, Das had said “the RBI will not hesitate to use any instrument — conventional and unconventional — to mitigate the impact of coronavirus disease (Covid-19), revive growth, and preserve financial stability”. 

Das on Friday said the central bank would do “whatever it takes to cushion the economic blow of the Covid-19 pandemic”. 

 

 
A cap on reverse repo amounts, another source said, “folds into this stance”.
In a separate but related development, liquidity concerns and measures to better the flow of credit are expected to figure at the RBI’s central board meeting — the first after the breakout of the pandemic — next month.

The meeting, which was to be held on April 28, is now scheduled to take place sometime in the first fortnight of May. The cap on the amount of funds banks park at the reverse repo window (if it were to be imposed) will mirror the precedent set in the case of repo — funds availed of by banks — in the past.

This was pegged at 1 per cent of a bank’s net demand and time liabilities (NDTL) — 0.25 per cent on an overnight basis and 0.75 per cent in the term — and was done away with last year. Top banking sources said it had been conveyed to the banking regulator after its March 27 measures that some of the larger banks were abstaining from lending adequately in the call-money market, thereby squeezing the smaller banks.
Senior bankers had called the RBI’s attention to the redemption pressure faced by mutual funds, and the knock-on effects of this on trading and investments in debentures and commercial papers. The plea also included a proposal that banks be provided unencumbered lines from the RBI to the extent of 10 per cent of their NDTL. The subsequent RBI moves took on board these concerns. 

It was pointed out that the banking regulator’s move to levy an interest at the repo rate plus 200 bps on undeployed funds under the targeted long-term repo operations was a clear signal that these have to be deployed. So too the insistence that specified eligible instruments will have to be acquired “up to 50 per cent from primary market issuances and the rest from the secondary market”. This is to ensure liquidity remains in the pockets needed, and to prevent clogging in the credit markets.

 



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