Banks propose RBI switch to overnight liquidity management, new benchmark

Indian lenders have suggested that the central bank move to an overnight liquidity infusion instrument from a longer duration tool and adopt a new benchmark for overnight rates, five sources aware of the matter said on Friday.

"The 14-day repo has outlived its time and with 24-hour banking, we need daily liquidity management tool so banks have suggested the Reserve Bank of India to revert to overnight operations at a fixed rate," one of the sources said.

The RBI met select market participants on Thursday ahead of the first monetary policy decision for this financial year on April 9.

The 14-day variable rate repo, or reverse repo, has been the RBI's main cash management tool since a change in 2020 that was intended to reduce lenders' reliance on the central bank and pushing them to better predict their liquidity needs.

The central bank infuses funds into the banking system through repos, while sucking out cash using reverse repos.

The RBI has infused around 6.4 trillion rupees ($75.05 billion) of durable liquidity into the banking system since December and is scheduled to conduct open market purchases worth another 600 billion rupees this month.

Lenders have also suggested that the central bank cut its cash reserve ratio (CRR) again and switch to a new benchmark to replace the weighted average call rate as the operative target of monetary policy.

In December, the RBI proposed introducing a new benchmark overnight rate, called the Secured Overnight Rupee Rate (SORR), which banks recommended should be used as the new benchmark.

Last week, Reuters reported that the RBI may revert to giving banks a fixed amount of on-tap overnight liquidity after its temporary use helped rein in a large cash deficit, which is seen as critical for improving monetary transmission.