System Still Looking For Comfort From RBI On Liquidity: RBL Bank’s Jaideep Iyer

The RBI should increase durable liquidity in the financial system for bankers and customers to benefit from its rate cuts, according to Jaideep Iyer, Head of Strategy at RBL Bank.

 “We need to have as much an accommodative liquidity situation for us, for bankers and customers, to really benefit from the rate cuts. So currently, as we speak, despite the actions taken, we haven't really seen even bulk deposit rates or short-term CD (certificate of deposit) rates really come off. In fact, they are marginally higher as compared to the pre-repo rate cut,” he said during a conversation with NDTV Profit.

He explained that the RBI has taken several decisions to infuse liquidity over the previous one-and-a-half months, but the system is still expecting more comfort from the regulator. The RBI cut the repo rate by 25 basis points to 6.25% on February 7.

Calling it a “little peculiar” that the RBI is on a rate cut cycle now, he said that it is important to look at durable liquidity since variable rate auctions are short-term. Iyer expects the durable liquidity to be consistently higher from the beginning of the net financial year.

“What the system is really looking for, and I think a lot of that is also another one lakh crore of Open Market Operations (OMOs) announced, is that we need durable liquidity. It's a little peculiar that the RBI is now on a, let's say, rate cut cycle, or at least, you know, one is ruling out rate hikes unless something dramatically changes. And therefore, we need to have as much an accommodative liquidity situation for us to be able to, for bankers and customers, to really benefit from the rate cuts.

Durable liquidity simply means funds for longer periods, which ensures availability of funds for the banking system in a more structural manner. The RBI takes several measures from time to time to ensure durable liquidity by making adjustments to liabilities and the Government of India balances from the system liquidity. Durable liquidity helps to trickle down the benefits of a rate cut in the banking system.

When asked about the challenges to durable liquidity, he referred to the forex situation and how FII selling has weighed on the rupee. The RBI’s management of the dollar-rupee situation leads to a sacrifice of liquidity in the short term, and that’s a sentiment that needs to change, he said.

“But, I think this should begin to change from April. I think March will be tough, like it always is for liquidity. We've also seen cash in circulation for some reason go up, which is unusual given the massive adoption of UPI that we've seen. Unfortunately, that is always a drag on liquidity. Nothing one can do about it right now, but that's also a factor,” the banking expert explained.

On the connection between rate cuts and retail deposit rates, he said that first the short-term rates, such as those for bulk deposits, need to come down; only then will retail deposit rates decline. Such a scenario is at least two to three months away, if not longer, he added.