RBI Plans Liquidity Framework Revamp; Bankers’ Meet on April 3

The Reserve Bank of India (RBI) plans to meet bankers next week to discuss changes in its liquidity management framework. The goal is to ensure that borrowing costs remain closely aligned with the central bank’s policy rate, according to sources familiar with the matter.

Meeting Scheduled for April 3

RBI has scheduled a meeting with bank economists on April 3 to gather feedback on proposed changes. One of the key suggestions is to introduce shorter-maturity repurchase operations alongside the existing 14-day liquidity window.

Possible Changes in Liquidity Tools

An internal RBI panel has reviewed the liquidity framework, and the revised version may be announced soon. The central bank is considering using repurchase operations with different maturities, including overnight or short-tenor options, to manage liquidity more effectively.

Current Market Conditions and RBI’s Response

The discussions come as the RBI continues to cut interest rates and inject liquidity into the financial system to support economic growth. In January, the central bank introduced daily variable rate repurchase operations to address a cash deficit in the banking system.

Importance of Repurchase Operations

Repurchase (repo) operations allow RBI to provide short-term funds to banks, while reverse repurchase (reverse repo) operations help withdraw excess cash from the system. Since the liquidity framework was introduced in 2020, there have been instances where banks’ borrowing costs have significantly deviated from the RBI’s policy rate, affecting monetary policy transmission.

Next Policy Announcement on April 9

The RBI’s Monetary Policy Committee (MPC) will announce its next policy decision on April 9, which may provide further clarity on liquidity management changes.

Conclusion

The RBI’s efforts to fine-tune liquidity tools aim to ensure better rate transmission and financial stability. The upcoming April 9 policy decision may provide further insights.

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