India RBI Panel Suggests Flexible Funding Windows For Banks
The RBI may also use auctions of other maturities, ranging from overnight to seven days, to modulate cash levels with lenders.
A Reserve Bank of India panel has recommended that the central bank take a more flexible approach to managing how it provides money to lenders, a move aimed at ensuring changes in borrowing costs are more clearly felt in the real economy.
Instead of sticking mainly to its existing method — injecting or withdrawing cash from banks every two weeks — the RBI should primarily use a seven-day funding window, according to the panel’s report released Wednesday. This would help the central bank better control the flow of money and ensure that borrowing costs for banks are more closely aligned with the official interest rate.
Although the RBI intermittently uses short-tenor windows to adjust system liquidity, the formal adoption of the proposal would give lenders greater predictability in managing cash in the era of digital banking. By improving transmission, the move also aims to sharpen the effectiveness of this year’s rate cuts on economic growth at a time when India is facing an escalating US tariff threat.
The move also aims to sharpen the effectiveness of this year’s rate cuts
(image source: Bloomberg)
“The seven-day operation has a better chance of success compared to the 14-day operation, which attracted weak participation,” said Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership Ltd. He cited difficulties in predicting government cash flows over a 14-day period as a key reason for the limited success of the existing model.
The panel has invited comments on the proposals by Aug. 29.
Under the proposed framework, the authority will employ the so-called variable rate repurchase or reverse repurchase auctions for a seven-day tenure to adjust banking system cash. The RBI may also use auctions of other maturities, ranging from overnight to seven days, to modulate cash levels with lenders, the report suggested.
The RBI uses these auctions to lend or absorb funds from banks in exchange for securities.
Under the fortnightly cash framework, banks’ borrowing costs have often deviated sharply from the RBI’s policy rate. That’s hampered effective transmission and muddled policy signals.
