Indian lenders have urged the central bank to resume overnight liquidity management operations and ease cash reserve requirements, according to reports.

Key Highlights

• Banks urge RBI to reinstate fixed-rate overnight liquidity tools to manage daily cash needs.
• Lenders seek CRR relaxation from 90% to 70–85% daily maintenance to boost short-term liquidity.

The Reserve Bank of India (RBI) met with some lenders to solicit feedback on its liquidity management framework, the second such meeting in less than two months, following a similar discussion in April.

A formal shift in liquidity management has implications not only for banks, but for the entire economy, influencing everything from interest rates to bank lending and growth.

The 14-day variable repo has been the RBI's primary cash management tool since a change in 2020 that was intended to reduce banks' reliance on the RBI and encourage them to better predict their liquidity needs.

However, the RBI has been injecting funds on a daily basis since the middle of January.

"While participants were divided on how to operate the overnight rate, there was consensus that the RBI should shift to fixed-rate overnight liquidity instruments rather than longer-term instruments," according to reports.

In addition to the ongoing daily infusion via auction-based variable rate repos, banks want a fixed rate daily repo based on a percentage of their deposit base.

The RBI injects funds into the banking system through repos and absorbs cash via reverse repos.

Lenders have also asked for a relaxation of the daily cash reserve ratio (CRR), which is a percentage of deposits that must be held with the central bank.

The CRR is currently at 4%, and banks must meet at least 90% of this requirement daily. They have, however, suggested lowering it to 80-85 percent, with some traders proposing a reduction to 70 percent.

If implemented, these measures will provide more long-term funding to the banking system, boosting lending and accelerating growth, according to traders.

Over the last six months, the RBI has injected $100 billion into the banking system via CRR cuts, foreign exchange swaps, and aggressive bond purchases.