RBI plans to send new liquidity tool proposal

The Reserve Bank of India (RBI) will submit a fresh proposal to the government for introducing a new liquidity management tool as it grapples with strong foreign inflows, sources said.

The decision to reconsider the so-called standing deposit facility, or SDF, was taken at a meeting between the new Economic Affairs Secretary Subhash Chandra Garg and RBI Deputy Governor Viral Acharya on Monday, the people said, asking not to be identified. 

After a change of guard at the finance ministry with Garg taking charge from Shaktikanta Das, the government has eased its opposition to the new liquidity tool as absorbing flows with the existing set of instruments becomes challenging. The ministry had earlier opposed a proposal to introduce the tool on the grounds that it gave the central bank the discretion to set interest rates outside the purview of the monetary policy panel.

The RBI will submit details of how its proposes to implement the tool, the people said. The SDF doesn’t require the central bank to give any collateral to lenders when it mops up cash.

Flows has picked up pace as emerging markets continue to benefit from the US Federal Reserve’s paced interest-rate increases. Overseas investors have bought $20.2 billion worth of local bonds so far in 2017, according to depository data. Stocks have seen $8.5 billion worth of inflows. The central bank has been regularly intervening in the forex market to mop up inflows, according to Mumbai-based traders. 

Finance ministry spokesman D S Malik couldn’t be immediately reached for comment. A spokeswoman for the RBI didn’t immediately respond to an e-mail seeking comment.

Earlier this month, the RBI resumed the open market sale of bonds for the first time since October, as it seeks to manage the excess banking liquidity. Liquidity has seen a large surplus since Prime Minister Narendra Modi’s surprise note ban in November, and though the excess has come off, it still remains far from RBI’s target of neutral cash in the system.