The Reserve Bank of India (RBI) is set to meet bank economists on April 3 to discuss possible changes in its liquidity management framework. The central bank aims to ensure that borrowing costs remain better aligned with its policy rate, according to sources familiar with the matter.
Currently, the RBI primarily uses a 14-day repurchase operation as its key liquidity tool. However, discussions may focus on incorporating shorter-tenor repurchase operations, including overnight or variable-rate options, to improve cash flow stability in the banking system.
This comes after the RBI injected liquidity into the financial market to spur economic growth. The central bank in January introduced indefinite daily variable-rate repurchase operations to address a cash deficit in the system.
Repurchase operations help banks meet short-term funding needs, while reverse repurchase operations allow the RBI to absorb excess liquidity. Since the current framework was introduced in February 2020, there have been instances where banks’ borrowing costs have deviated significantly from the RBI’s policy rate, affecting monetary policy transmission.
The new liquidity framework is likely to be unveiled in the coming few weeks in the lead-up to the RBI’s next policy on April 9.
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Source: Moneycontrol.
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