RBI Allows Liquidity Reversal For Banks On Weekends And Holidays
The move will come into effect on Dec. 30.
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The Reserve Bank of India has allowed banks to reverse their liquidity through standing deposit facility and marginal standing facility, even on weekends and market holidays, Governor Shaktikanta Das said in his monetary policy speech on Friday.
The move will come into effect on Dec. 30.
"We have noticed high utilisation of MSF and SDF by banks...We have decided to allow reversal of liquidity facilities under both SDF and MSF even on weekends. It is expected that this will facilitate better fund management," the governor said.
This will be reviewed in six months or earlier, Das said.
This comes after Das had highlighted skewed liquidity distribution among banks, in his October monetary policy statement. He had advised banks to deploy their excess funds in the inter-bank call money market, rather than parking it in the RBI's standing deposit facility.
The SDF allows banks to deposit their liquidity with the RBI at a 6.25% rate, that is, 25 basis points under the prevailing repo rate.
The Marginal Standing Facility is an emergency borrowing window where banks can borrow funds from the central bank at 6.75%, that is, 25 basis points above the prevailing repo rate.
Banks parked funds worth Rs 1.20 lakh crore in two months ending November under SDF, as per RBI data. This figure stood at Rs 2.92 lakh crore in three months, starting July. Average borrowings under MSF increased to Rs 1.2 lakh crore during October and November.
"Deficit liquidity conditions persisted during October and November, prompting large recourse to the marginal standing facility by banks," Das said.
"In parallel, utilisation of the standing deposit facility has also been high."
The overall tightening of liquidity conditions is attributed primarily to higher currency leakage during the festive season, government cash balances and the RBI's market operations, the governor said.
In the October policy statement, Das had proposed the possibility of conducting the sale of government securities through the open market, to suck out liquidity from the financial system.
However, the need to undertake auction of OMO sales has not risen so far, Das said, considering autonomous factors have tightened the system liquidity "significantly, compared to what was envisaged in the October policy statement."
The move to allow liquidity reversal window on weekends and market holidays is likely to reduce volatility in the inter-bank call money rates, according to Karthik Srinivasan, senior vice president, group head - financial sector ratings of ICRA Ratings.
"...the extent of balances used in MSF and SDF facilities over the weekend (may) also moderate," Srinivasan said. "However, given the overall tight liquidity in the banking system, we do not expect the call money rates to decline substantially."
This will also cut interest costs for banks marginally who borrow funds from MSF and deposit in SDF over the weekend, he added.