Banks' average daily reserves fall after FIT framework: RBI report

RBI introduced ASISO facility in August 2020 to offer greater flexibility in managing day-end cash reserve ratio balances

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The average daily reserves maintained by banks have come down, resulting in freeing up incremental resources that may be deployed for productive purposes after the Reserve Bank of India (RBI) adopted a flexible inflation targeting (FIT) framework in 2016 and introduced automatic sweep in sweep out (ASISO) facility, according to report by RBI staffers.

 

Additionally, the volatility in daily reserves maintenance as a percentage of requirement is significantly lower under the post-ASISO regime, enabling banks to effectively manage their daily reserves, said the report.

 

The RBI introduced the ASISO facility in August 2020 to offer greater flexibility in managing day-end cash reserve ratio (CRR) balances. Under this facility, banks are able to pre-set a specific amount (or range) that they wish to maintain at the end of the day. Any shortfall or excess balances maintained by banks would automatically trigger marginal standing facility (MSF) or standing deposit facility (SDF) /reverse repo bids under the ASISO facility.

 

In India, reserves by banks need to be maintained on an average basis over a fortnight. However, a certain per cent of the CRR requirement needs to be maintained on any given day during the fortnight. This has helped banks in their day-to-day liquidity management to meet unforeseen flows while avoiding undue volatility in demand for funds.

 

Daily maintenance of CRR depends on the business considerations of banks on the evolving interest rate scenario. Moreover, at the systemic level, if the liquidity is in surplus during the first week of the reserve maintenance period, it could take care of the average requirement for the entire fortnight if the liquidity is deficit in the second week, the report said.

 

Additionally, volatility in daily excess reserves maintained by scheduled banks as a proportion of net demand and time liabilities (NDTL) has fallen during the FIT period mainly due to the refinements in liquidity management and operating procedure of the monetary policy, it said.

 

In the pre-FIT period, banks were maintaining reserves in the range of 85 to 120 per cent of requirement along with a positive skew. During the FIT period, the range of daily reserve balances was reduced (in the range of 95 to 115 per cent) with some outliers.  

 

According to the report, in the FIT period, more banks were maintaining below 100 per cent on some days of the fortnight. With the improvement in the liquidity management framework during the FIT period, banks choose an optimum strategy of holding reserves based on their intraday cash flows and money market participation — enabling them to be more flexible in managing daily reserve requirements, the report said.