To help banks manage their fund flows, the Reserve Bank of India (RBI) will conduct liquidity operations every Saturday, in addition to the daily operations five days a week, the RBI said in a release on Friday.
The central bank will offer banks a window to borrow funds through the Marginal Standing Facility and also help them deal with excess cash by offering a reverse repo tender to park excess funds.
Banks can borrow from the MSF, an emergency window, at 8.75% which is 100 basis points higher than the repo rate. They can park excess funds at the reverse repo tender to earn 6.75%.
The RBI’s move comes after call money rate surged on February 7 due to unexpected service tax outflows. As the export refinance window was shut, banks did not have any window to borrow funds from. The weighted average call money rate was 11% that day, sharply up from an average of 7% daily.
“The genuine borrowers will come for MSF even though it is one percent higher. At least the volatility of the call money market will be contained. On February 7, the call money market had deals even at a high of 60%,” said Ashutosh Khajuria, head of treasury at Federal Bank.
Tellingly, the RBI has kept the access to the daily repo tender,which gives funds to banks at the repo rate of 7.75%, unchanged at five days a week.
Bankers said the RBI wants just to help banks tide over fund mismatches and not provide unbridled access to funds on all days.
At present, the RBI provides liquidity through daily repo tenders, MSF and term repos. The banking system’s liquidity deficit has widened since. Banks’ outstanding borrowings from the RBI through various windows stood at R1.29 lakh crore on Wednesday, higher than R90,000 crore a month ago.
“The Reverse Repo and MSF operations conducted on Saturdays will ordinarily be for a tenor of two days with reversal on the following Monday,” the RBI said.