Indian lenders have suggested that the central bank switch from a longer-term liquidity infusion tool to an overnight liquidity infusion instrument and adopt a new overnight rate benchmark, according to sources familiar with the situation.
"The 14-day repo has outlived its time and with 24-hour banking, we need daily liquidity management tool so banks have suggested the Reserve Bank of India to revert to overnight operations at a fixed rate," a source close to the matter claimed.
The RBI met with select market participants on Thursday, ahead of the first monetary policy decision of the fiscal year on April 9.
The 14-day variable rate repo, also known as the reverse repo, has been the RBI's primary cash management tool since a change in 2020, which was intended to reduce lenders' reliance on the central bank and encourage them to better predict their liquidity needs.
Through repos, the central bank adds money to the banking system, and through reverse repos, it takes money out.
About 6.4 trillion rupees ($75.05 billion) in long-term liquidity have been added to the banking system by the RBI since December, and this month it intends to make an additional 600 billion rupees in open market purchases.
Lenders have also suggested that the central bank reduce its cash reserve ratio (CRR) and adopt a new benchmark to replace the weighted average call rate as the operative target of monetary policy.
In December, the RBI proposed a new benchmark overnight rate, known as the Secured Overnight Rupee Rate (SORR), which banks suggested should be used as the new benchmark.
Last week, it was reported that the RBI may return to providing banks with a fixed amount of on-tap overnight liquidity after its temporary use helped to reduce a large cash deficit, which is seen as critical for improving monetary transmission.
