RBI unlikely to re-introduce policy of daily fixed-rate lending to banks. Here’s why

MUMBAI (Reuters) -India’s central bank is unlikely to re-introduce the policy of lending money daily to banks at a fixed rate, despite increased clamour for it from market participants, three sources said on Thursday.

The policy, called fixed rate liquidity operations, will help banks manage their needs better, several bankers proposed to the RBI in meetings held over the last few months. 

Banks had asked for the quantum of infusion to be fixed on a percentage of their deposit base.

“The RBI is clearly not in favour of hand-holding banks and wants to keep any liquidity operation on a variable rate,” one source said.

The sources requested anonymity as they are not authorised to speak to media. The RBI did not reply to a Reuters email seeking comment.

In variable repo or reverse repo, through which RBI injects or absorbs cash, banks have to undergo a bidding process based on their funding needs. 

Last week, overnight inter-bank call money rates jumped above marginal standing facility rate, which is the policy corridor ceiling, after banks parked funds with RBI under reverse repos. They then faced a shortage after tax outflows.

“On days like that, it helps if there is a repo window available,” the second source said.

Lenders also asked for relaxation of daily maintenance of the cash reserve ratio, which is the percentage of deposits that they need to park with the RBI.

The RBI is also reviewing the liquidity management framework. The revised framework could be released alongside the monetary policy decision on August 6, some market participants said. 

The sources said that the RBI may shift to a seven-day operation as the main liquidity tool, instead of the current 14-day auctions adopted in 2020. The bank has skipped conducting the 14-day operation since the last six fortnights.

RBI’s Battle Against Inflation

The Reserve Bank of India has “won the battle against inflation” but the war is ongoing as price stability remains the central goal, Governor Sanjay Malhotra said during a fireside chat at a Financial Express event on Friday.

The RBI delivered a larger-than-expected 50 basis point rate cut at its June policy review but shifted its stance to “neutral,” suggesting limited room for further easing.

However, with retail inflation falling to a six-year low and likely to hit a record low in July, calls have grown for at least one more rate cut this year. Many analysts argue the sharp disinflation also points to weakening demand in the economy. 

Malhotra said monetary policy being forward looking, will place greater focus on the outlook for growth and inflation, rather than current levels when the policy panel meets on Aug. 6.

The change in stance to “neutral” did not mean a reversal from the easing of policy, he said.

“We have the flexibility to move up, down or pause. Yes, it does mean, the bar for further easing is higher than it would have been if it (stance) was accommodative,” he added.

Monetary policy transmission has quickened due to front-loaded rate cuts and will help in supporting economic growth as overall flow of funds to the industry and economy is improving, Malhotra said.

Further monetary policy measures would depend on the requirement but the central bank has enough ammunition in its armory to use as and when required, he added.

(Reporting by Dharamraj Dhutia; Editing by Harikrishnan Nair)

(Reporting by Swati Bhat; editing by Sudipto Ganguly and Nivedita Bhattacharjee)