RBI Open To 14-Day Repo As Liquidity Starts Drying Up — BQ Exclusive

However, the central bank wants to see credible indications that the system is actually in deficit, with banks no longer parking funds under the Standing Deposit Facility and Variable-Rate Reverse Repos.

It can’t be that banks are parking money with the RBI under such windows while simultaneously borrowing under the 14-day term repo, the person in the know said on the condition of anonymity. If 14-day term repos are brought back in a periodic manner, then that means liquidity has hit neutral or deficit mode, the person said.

As per the RBI’s liquidity framework, the 14-day repo was meant to be the main operating instrument for liquidity, but the unprecedented nature of the Covid-19 pandemic had compelled the central bank to offer various liquidity enhancement facilities, such as multi-year term repos and bond purchase windows.

The person in the know said the RBI is prepared to provide committed liquidity support through term repo windows, but will do so when liquidity in the system is tight as facilities such as targeted long-term repo windows that were introduced during the peak of the Covid-19 pandemic in 2020 get repaid.

"The banks are requesting 14-day repo funds but want to simultaneously deploy funds in VRRR and SDF, the person said, adding that this is not acceptable.

About Rs 87,000 crore will exit the system in March or April, which will push the system into neutral or deficit mode on liquidity, the person said. This will be compounded by higher liquidity demand for banks for meeting financial year-end credit and reserve needs combined with outflows linked to tax payments in March.

A pre-monetary policy report from the State Bank of India’s economic research team estimates that core liquidity plus surplus, which includes Rs 1.96 lakh crore of government cash balances, was at Rs 2.51 lakh crore on Feb. 2, 2023. This report estimates net absorption under the RBI’s liquidity facilities at just Rs 54,000 crore.

This is a sharp decline from core liquidity plus a surplus of Rs 8.32 lakh crore in April 2022, with government cash balances at just over Rs 1 lakh crore and net absorption under the RBI’s facilities at Rs 6.35 lakh crore.

The shift in liquidity to neutral deficit is a crucial indicator for the RBI as it indicates a return to almost pre-pandemic levels on most counts, the person quoted earlier said. The RBI has always wanted the system to operate with a 14-day variable rate repo as the functional instrument, the person said.

Even as most market participants expect the Monetary Policy Committee to raise the repo rate by 25 basis points on Wednesday, there are some quarters that have also called for a shift in the monetary policy stance to neutral from a withdrawal of accommodation.

The liquidity shifting from absorption mode to neutral or deficit with RBI consistently offering 14-day term repos could well indicate that a shift in stance may not be too far away.