How will RBI manage cash in the system?
MUMBAI: Managing excess cash in the banking system is set to pose a challenge to the central bank, as the government sits on a proposal to create the so-called Standing Deposit Facility (SDF) and due to the cap on bond sales under the Marker Stabilisation Scheme (MSS). A likely surge in US dollar flows could add to the problem.
Under the SDF, a monetary tool, the Reserve Bank of India would be able to absorb excess liquidity in the system without providing banks any collateral in exchange.
The RBI so far has been borrowing money from banks through reverse repo auction as well as sale of bonds to reduce cash that banks have been holding. Remonetisation, or pumping back into circulation the cash sucked out through demonetisation, too was helping reduce the liquidity at banks.
"Durable and semi-durable liquidity will be managed with a combination of longer-tenure, reverse repos and open market operations," governor Urjit Patel said at press conference he held after announcing RBI's money policy.
"Liquidity associated with the forex flows will be managed with securities under the MSS, although the budgetary provisions of capping them to gross issuances at Rs 1 lakh crore will be an operational constraint that circumscribes the effective use of MSS as an instrument of liquidity management," he said. "(It) increases the burden on RBI's own instrument mix. But, we will endeavour to manage."
About three year ago, an expert committee headed by Urjit Patel, the then RBI deputy governor, had first broached the Standing Deposit Facility concept, now seen as a strong tool to suck out excess cash from the banking system.
It may replace reverse repo, now being used frequently. But, RBI's stock of government securities limits its capability to do more such auctions.
"Next three to four quarters we do need to manage the quantum of liquidity that remains," said Viral Acharya, a deputy governor at the RBI. "As the governor alluded to, we will employ the whole tool kit that have at our disposal within whatever constraints we face ... in well telegraphed and nimble manner so that not to have a price impact on Gsecs."
The main advantage of an SDF is that it gives the central bank a window to intervene in both directions, when needed, to achieve the operating interest rate target, with volatility in interbank rates restricted to the corridor, the expert committee had said while submitting its report to the RBI.
The facility, though less in use, helps to define a floor rate in the inter-bank market, especially in liquidity surplus conditions.
The RBI has injected durable liquidity of Rs 2.1 lakh crore during the year up to November 8, 2016 in the form of open market purchases of sovereign bonds.
With remonetisation, the average liquidity in the system was Rs 4.80 lakh crore compared with Rs 7.95 lakh crore in January.
Under the SDF, a monetary tool, the Reserve Bank of India would be able to absorb excess liquidity in the system without providing banks any collateral in exchange.
The RBI so far has been borrowing money from banks through reverse repo auction as well as sale of bonds to reduce cash that banks have been holding. Remonetisation, or pumping back into circulation the cash sucked out through demonetisation, too was helping reduce the liquidity at banks.
"Durable and semi-durable liquidity will be managed with a combination of longer-tenure, reverse repos and open market operations," governor Urjit Patel said at press conference he held after announcing RBI's money policy.
"Liquidity associated with the forex flows will be managed with securities under the MSS, although the budgetary provisions of capping them to gross issuances at Rs 1 lakh crore will be an operational constraint that circumscribes the effective use of MSS as an instrument of liquidity management," he said. "(It) increases the burden on RBI's own instrument mix. But, we will endeavour to manage."
About three year ago, an expert committee headed by Urjit Patel, the then RBI deputy governor, had first broached the Standing Deposit Facility concept, now seen as a strong tool to suck out excess cash from the banking system.
It may replace reverse repo, now being used frequently. But, RBI's stock of government securities limits its capability to do more such auctions.
"Next three to four quarters we do need to manage the quantum of liquidity that remains," said Viral Acharya, a deputy governor at the RBI. "As the governor alluded to, we will employ the whole tool kit that have at our disposal within whatever constraints we face ... in well telegraphed and nimble manner so that not to have a price impact on Gsecs."
The main advantage of an SDF is that it gives the central bank a window to intervene in both directions, when needed, to achieve the operating interest rate target, with volatility in interbank rates restricted to the corridor, the expert committee had said while submitting its report to the RBI.
The facility, though less in use, helps to define a floor rate in the inter-bank market, especially in liquidity surplus conditions.
The RBI has injected durable liquidity of Rs 2.1 lakh crore during the year up to November 8, 2016 in the form of open market purchases of sovereign bonds.
With remonetisation, the average liquidity in the system was Rs 4.80 lakh crore compared with Rs 7.95 lakh crore in January.
