RBI Skips Key Cash Tool Again, Fuels Policy Shift Buzz
The Reserve Bank of India said Wednesday it would not conduct its usual 14-day cash operations for the fortnight April 17 to May 2 based on a review of evolving liquidity conditions.
India’s central bank has again held back its primary cash management operation, stoking speculation about a possible shift in how the authority handles bank liquidity.
The Reserve Bank of India said Wednesday it would not conduct its usual 14-day cash operations for the fortnight April 17 to May 2 based on a review of evolving liquidity conditions. That would mark the third straight fortnight it has canceled the window.
This tool has been the main way the central bank controls the amount of money circulating in the banking system, according to its current liquidity framework. But it hasn’t been used in about five weeks. In its place, the RBI has been providing daily and short-term cash windows — such as five-day operations — intermittently.
This has fueled talk that a more flexible approach — rather than allowing lenders to access cash in fixed two-week blocks — may be the preferred way to managing liquidity as the new leadership reviews how to better align borrowing costs with the policy rate. Last week, Governor Sanjay Malhotra said that matters related to the liquidity framework were still being deliberated.
“It looks like the RBI is reviewing its stance on conducting the 14-day VRR auctions. It appears that a few things might change under the new (RBI) leadership,” said Vivek Kumar, economist at QuantEco Research.
The new approach seems to be working: the overnight borrowing rates are now much closer to the RBI’s policy rate. That helps banks to better pass on the recent rate reductions, making loans cheaper for businesses and consumers.
“Even though the RBI has not yet officially rolled out the new liquidity management framework, in action, liquidity management has already changed over the last few months,” said Gaura Sen Gupta, chief economist at IDFC First Bank.
