Context:
Lenders have urged the Reserve Bank of India (RBI) to revert to the daily overnight borrowing window as the main liquidity tool. They argue this shift would improve systemic liquidity predictability and enable faster transmission of policy rate cuts.
Key Discussion Points
- Meeting Held: Thursday between RBI officials and top bank representatives
- Request Made: Shift from the current 14-day Variable Rate Repo (VRR) to daily, on-tap borrowing
- Reasoning:
- Difficulty in forecasting fortnightly liquidity needs due to 24×7 payment systems
- Need for predictable, readily accessible liquidity support
- Daily auctions are already being conducted; formal framework change sought
Liquidity Framework
- Current Model (Feb 2020 onwards):
- 14-day VRR as the main tool
- Auctions from overnight to 13-day tenors for fine-tuning
- January 2025 Update: RBI began daily VRR auctions on working days, improving liquidity
Banking System & Market Impact
- Systemic Liquidity: Shifted from deficit to mild surplus in March
- Deposit Rates: Reduced by 25–40 basis points in anticipation of liquidity surplus
- Impact on Lending: Lower deposit rates will help reduce MCLR (Marginal Cost of Fund-based Lending Rate)
TET
