RBI to use cash reserve ratio for liquidity, policy transmission: Report

India's central bank plans to use the cash reserve ratio more frequently to manage liquidity and aid policy transmission, rather than deploying it only during extreme cash swings, a source told Reuters on Wednesday.

The person aware of the Reserve Bank of India's thinking declined to be identified because they are not authorised to speak to the media. The RBI did not reply to an email seeking comment.

The central bank last week announced a surprise 100-basis-points reduction in CRR, the portion of deposits banks must park with the RBI, in four equal tranches, taking take it down to 3%.

The move will release 2.5 trillion rupees ($29.25 billion) into the banking system.

RBI governor Sanjay Malhotra had then said that the regulator was "comfortable" with a 3% CRR, but did not give other details.

With banks' total deposit base having grown in recent years, the need to maintain the CRR at a minimum of 4% to manage crisis situations is no longer seen as necessary, the source said.

"CRR is a good tool to have from a liquidity management perspective and the scope goes beyond just an emergency tool, it will be used more often from now," the person said, adding that the ratio could also be raised to absorb a large liquidity influx caused by sustained foreign inflows and is more efficient than conducting multiple open market operations.

Between December and May, the RBI injected nearly $100 billion into the banking system via OMOs and FX swaps, its largest such infusion over a similar period.

A shift toward managing liquidity via CRR, previously unreported, could reduce the need for bond buys that often distort market yields.

ANCHORING RATES

A large cash surplus in the banking system had also pushed the weighted average overnight call rate - the operative policy rate - well below the RBI's key repo rate, currently at 5.5%.

"The RBI wants the overnight call rate to be around the repo rate, steps will be taken to ensure that happens," the source said, adding that the RBI could start conducting variable rate reverse repo auctions to suck out surplus liquidity as and when required.

The source also said the central bank was uncomfortable with the 10-year benchmark yield falling significantly below existing levels.

The RBI is currently in the process of drafting a revised liquidity management framework, and existing operations will continue until the new framework is finalised, the source said.