Indian creditors have asked the central bank to inject sustainable liquidity into the banking system following a significant decline in a key measure of liquidity, six Treasury officials said.
A select group of market participants met with officials from the Reserve Bank of India late Thursday, raising concerns about continued tightening liquidity conditions.
The liquidity crunch, if continued, is likely to keep banks’ borrowing rates high, which could impact lending rates at a time when India’s economic growth slows down.
“Suggestions such as longer-term floating rate repos, currency swaps and open market bond purchases were made,” said one of the officials who attended the meeting.
A few bankers have also suggested a temporary reduction in the cash reserve ratio – the proportion of deposits that banks must keep with the RBI in cash – for banks.
The RBI did not immediately respond to an email from Reuters seeking comment.
HIGH RATES
Liquidity in the banking system has been in deficit since mid-December, with an average daily deficit of around 1.50 trillion rupees ($17.47 billion) over the past five weeks.
Core liquidity, a more stable measure of overall liquidity, declined to around 300 billion rupees in early January from a peak of around 4.6 trillion rupees in early September, according to Gaura Sen Gupta, India economist at IDFC FIRST Bank.
-“This decline is due to the RBI’s intervention in the foreign exchange market… It is likely that core liquidity will turn negative with increasing foreign exchange leakage in the last quarter,” she said. declared.
“If pressure to depreciate the rupee persists, foreign exchange flight will persist.
Bankers pointed out that keeping the overnight rate above the Marginal Standing Facility rate – meaning banks borrow at high interest rates from the RBI – went against the The objective of a neutral policy, as they would not be able to pass on the benefits to customers.
The weighted average interbank cash rate rose to 6.83% on Thursday, its highest level since late June, as most banks continued to borrow from the market. CONCERNS ABOUT THE RUPIE
Bankers said they were concerned about unhedged corporate exposures following the rupee’s recent rapid decline, and pointed to continued demand for dollars in the non-deliverable futures market – an important factor that allows the rupee to regularly reach new historic lows.
A banker said they discussed the rise in the overnight swap rate on December 31, which happened as banks rushed to convert surplus dollars into rupees.
This banker stressed that it had been difficult to roll over the excess dollar liquidity caused by the RBI’s interventions.
($1 = 85.8650 Indian rupees)
