The Reserve Bank of India (RBI) is taking a re-look at the differential between the interest rates at which it accepts money and lends the same to banks in reverse repo and repo deals, respectively.
Speaking to FE exclusively after unveiling the mid-term review of the RBI Annual Policy on Tuesday, RBI governor YV Reddy said a central bank committee was looking into various aspects of these rates ? more known as interest corridor rates ? given the current and future liquidity scenario in the system.
The RBI has already announced a hike in banks cash reserve ratio by 50 bps from the present 7% level at its mid term review of Annual Policy for the current fiscal on Tuesday. This will usurp Rs 16,000 crore of cash from the system, leaving the market with a surplus of Rs 14,000 crore of liquidity in the system.
?We will wait and see the developments instead of draining out the liquidity at one go,?? Reddy said.
The governor did not disclose details on the corridor rate structure but bankers expected the RBI to come out with variable rates and targeted amounts depending upon the daily liquidity situation of the market. Reddy had earlier prescribed 100 bps differential between the two rates. ?Subsequently, the rates were revised upward to 175 bps because of the high liquidity,? he said.
At the moment, the rush is only for reverse repo deals at 6% and there are practically no takers (borrowers) at the upper end band or repo of 7.75%. This is largely because banks are not hard-pressed for money at present and instead sitting on hard cash due to the slowdown in credit offtake coupled with the high growth in their deposit base.
Deploying these deposits in higher-paying assets has been a daunting task for bankers and that explains the rush for RBI?s reverse repo deals ? where banks park short-term funds at 6% and get bonds in return, till they identify better assets.
However, if RBI lowers this rate, it could signal a lower interest rate regime across the board and if it lowers the upper band it would be insignificant for the market flush with funds.
?It will only give me a cushion that the RBI is there to lend against bonds (in repos at 7.75%) if the liquidity becomes tight, as was the scenario in March,? said a senior official at a state-owned bank.