Indian lenders have proposed that the central bank shift from a longer-duration liquidity tool to an overnight infusion mechanism and introduce a new benchmark for overnight rates, according to five sources familiar with the matter on Friday.
“The 14-day repo has outlived its time and with 24-hour banking, we need daily liquidity management tool so banks have suggested the Reserve Bank of India to revert to overnight operations at a fixed rate,” according to one of the sources.
The Reserve Bank of India (RBI) held discussions with select market participants on Thursday in anticipation of the first monetary policy decision for this financial year on 9th April.
Since a policy shift in 2020, the 14-day variable rate repo or reverse repo has served as the RBI's primary cash management tool, aiming to reduce banks' dependence on the central bank and encourage them to more accurately assess their liquidity requirements.
The central bank injects liquidity into the banking system through repos and absorbs excess cash using reverse repos, Reuters reports.
Since December, the RBI has added approximately 6.4 trillion Rupees ($75.05 billion) of long-term liquidity into the banking system and plans to conduct open market purchases worth an additional 600 billion Rupees this month.
Lenders have also urged the central bank to further reduce the cash reserve ratio (CRR) and adopt a new benchmark to replace the weighted average call rate as the primary monetary policy target.
In December, the RBI proposed the introduction of a new benchmark overnight rate, the Secured Overnight Rupee Rate (SORR), which banks have recommended as the preferred replacement.
Last week, Reuters reported that the RBI might return to providing banks with a fixed amount of on-tap overnight liquidity after its temporary implementation helped curb a significant cash deficit, a move considered crucial for enhancing monetary transmission.