RBI expects to keep sufficient surplus in the banking system to ensure policy transmission and is looking at a level of around 1% of deposits, Governor Sanjay Malhotra said.
The Reserve Bank of India is expected to keep sufficient surplus in the banking system to ensure policy transmission and is looking at a level of around 1% of deposits, Governor Sanjay Malhotra said in his monetary policy address.
That works out to about Rs 2 trillion ($23 billion), based on market estimates of deposits of about Rs 250 trillion, Reuters reported. However, the surplus averaged around Rs 1.66 trillion in April and was in deficit the previous four months.
In the run-up to the policy meeting, bankers wanted guidance on the RBI's comfort with the 1% liquidity level, as per the Reuters report.
"I would not like to pin myself down to the 1% number exactly, but that is the kind of range, near about that range," Malhotra said.
"If more is required, we will do more; if less is required we will do less. The main aim is to mention proper transmission of repo rate into interest rates."
The governor said the RBI would monitor the evolving market conditions and proactively take appropriate measures "to ensure adequate liquidity," a change in language from February when the aim was "to ensure orderly liquidity conditions."
Malhotra was speaking shortly after the RBI reduced the repo rate by 25 basis points and changed its policy stance to "accommodative" from "neutral".
So far this year, the RBI has infused Rs 5.41 trillion into the banking system via bond purchases and forex swaps, and it is set to buy another Rs 400 billion in bonds in April, Reuters reported.
It also conducts daily overnight repos, a practice it started in mid-January during a large liquidity deficit.
Banks should ideally borrow and lend amongst themselves, but some banks prefer to borrow from the RBI and we do not want to curtail that facility, Malhotra added.
The central bank is also reviewing its liquidity management framework.
It is considering whether to continue targeting the overnight rate for policy repo rate transmission, or explore alternatives, Malhotra said, adding the RBI was also consulting various stakeholders in this regard.
