RBI signals tighter liquidity ahead
Bankers said they expect liquidity to remain either at current levels or tighten further which could lead to higher deposit rates as banks seek funds especially because credit growth is picking up. ‘Even if liquidity does not tighten from the current levels, it will not go back to the surplus we have seen before. The RBI will step in only when there is a huge from the system. As a result, the weighted average call market rate could be close to marginal standing facility (MSF) rate,’ said Arun Bansal, head of treasury IDBI Bank.
Currently, liquidity in the banking system remains in surplus with the average absorption under the liquidity adjustment facility (LAF) at Rs 1.4 lakh crore, though down from the average of Rs 2.2 lakh crore during August-September. MSF is an emergency window for banks to borrow from RBI. The MSF rate is pegged 25 basis points above the repo rate and currently is at 6.50%.
Governor Shaktikanta Das said the central bank will step in and provide liquidity ‘to meet the requirements of the productive sectors of the economy’ but also added that it will do so only after seeing durable signs of a turn in the liquidity cycle.
‘The Reserve Bank remains committed to flexibility and two-sidedness in liquidity operations, but market participants must wean themselves away from the overhang of liquidity surpluses,’ Das said. Bankers said the governor’s comments means banks will now also have to price in tighter liquidity.
‘We expect to see neutral liquidity in the banking system than surplus liquidity. This means both deposit rates, as well as credit spreads, can see an upward bias,’ said Ashish Vaidya, head of treasury at DBS Bank India.
Separately in a relief to banks, RBI has said banks can continue to invest 23% of their deposits in the so called held to maturity (HTM) category up to March 31, 2024, insulating them from market volatilities. This dispensation was allowed post Covid for bonds acquired on or after September 1, 2020, up to March 31, 2023 and now has been extended for securities acquired until March 31, 2024. RBI said banks will have to start reducing their HTM exposure from the quarter ending June 30, 2024.
(News Source -Except for the headline, this story has not been edited by Times Of Nation staff and is published from a economictimes.indiatimes.com feed.)
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