RBI to meet bankers next week to discuss liquidity management framework

It met economists on Thursday for pre-policy consultation; economists divided over change in stance

The Reserve Bank of India (RBI) will meet bankers on April 3 to discuss its liquidity management framework, said multiple sources aware of the development. It is widely expected that the RBI may announce some changes in its liquidity management framework during the April monetary policy committee (MPC) meeting.

 

Sources further said that banks want clarity on the RBI’s comfort with liquidity in relation to Net Demand and Time Liabilities (NDTL), which is expected to be discussed at the meeting. The RBI's "comfort" level with liquidity is typically reflected by the amount of surplus liquidity it permits in the banking system.

 

“The comfort level of RBI may be at 1.5 per cent or 2 per cent of the NDTL now, given the current liquidity situation. Banks may ask the central bank for some action or guidance regarding maintenance of a certain percentage of NDTL,” said a source.

 

Separately, ahead of the MPC meeting scheduled for April 7-9, the RBI held a pre-policy consultation with economists on Thursday. According to sources, a majority of economists supported a 25 basis points (bps) rate cut in the April policy along with additional liquidity measures to ease the prevailing liquidity deficit.

 

However, opinions were divided on the policy stance — while some economists advocated a shift from neutral to accommodative, others favoured maintaining the current neutral stance. The RBI in February policy cut repo rate by 25 bps after nearly five years, but continued with the neutral stance.

 

Meanwhile, net liquidity in the banking system narrowed to ₹40,788 crore on Wednesday on the back of government spending and the $10 billion swap auction conducted by the central bank on Monday, said experts.

 

The net liquidity in the banking system was in a deficit of ₹1.57 trillion on Tuesday, RBI data showed. The banking system’s net liquidity has been in a deficit mode since mid-December, and it had widened to a deficit of ₹3.2 trillion in January.

 

“Liquidity improved because of government spending and swap auctions… Around ₹90,000 crore would have come via swap,” said Gaura Sen Gupta, chief economist at IDFC FIRST Bank. “The liquidity will turn into a mild surplus by the end of March, the impact of government spending is now already beginning to be felt. And, we will see more of it in the month end and first week of April,” she added.

 

The RBI had received bids worth $22.28 billion at the USD/INR buy-sell swap auction on Monday, against the notified amount of $10 billion.

 

“The reduction of the liquidity deficit indicates that the RBI’s measures to inject liquidity into the system have been effective. The central bank infused substantial liquidity ahead of advance tax and GST payments, and the current levels suggest that these measures have yielded the desired results. Additionally, the RBI is mindful of the typical credit pickup towards the end of the current financial year (FY25) and has worked to keep the deficit in check. Looking ahead to FY26, a significant and persistent liquidity deficit is unlikely,” said Madan Sabnavis, chief economist, Bank of Baroda.

 

Since January, the central bank has actively managed liquidity by adjusting the volume of repos on a daily basis, and holding multiple auctions within a single day. Since then the central bank has injected over ₹5 trillion of durable liquidity into the banking system through government securities purchases via Open Market Operation (OMO) auctions and dollar-rupee buy-sell swaps. Another ₹1.8 trillion was infused through repos maturing in early April. 

 

(With inputs from Subrata Panda)