From 11:59 pm, the central bank could contemplate opting for a much earlier time for computation of the CRR, which is a mandatory reserve requirement for banks, sources said. The CRR is currently at 4.5% of net demand and time liabilities (NDTL), a proxy for deposits.
Through industry bodies, banks are said to have recently discussed the timing of CRR computation with the RBI, with the demands of 24/7 banking being one of the key points taken up, sources said.
A change in the timing of CRR computation could free up some of the surplus funds being deployed by banks at the RBI’s Standing Deposit Facility (SDF) window. This in turn, would help prevent the call rate from hardening as more funds would be available in the call money market, treasury executives said.
Rates & Liquidity Squeeze
The deliberations came in the aftermath of a sharp increase in the weighted average call rate (WACR) and other pricing benchmarks such as the Mumbai Interbank Offered Rate (MIBOR) from late April to the second fortnight of May. The WACR, which is the operating target of the RBI’s monetary policy, had risen well past the central bank’s benchmark policy repo rate of 6.5%.
The fact that the rise in the overnight funding rates had occurred despite the presence of surplus liquidity in the system suggested that unpredictable financing obligations arising due to 24/7 banking had led to a larger portion of banks’ funds being kept at the RBI’s absorption windows than earlier, treasury executives said.
“In May, we had episodes of banks borrowing funds well above the MSF (Marginal Standing Facility) rate in the morning in anticipation of funding obligations and then parking those same funds at the SDF, which is at a rate of interest that is 50 basis points lower,” a bank treasury executive said.
The MSF, which is the upper band of the RBI’s interest rate corridor, is currently at 6.75%.
In December 2019, the RBI permitted the National Electronic Funds Transfer (NEFT) to function 24 hours for 365 days of the year. A year later, the Real Time Gross Settlement System (RTGS) also became a 24/7-365-day facility.
“There has been digitalisation of payments. As the size of the economy grows, we will see an increase in terms of the size of cumulative transactions. The bigger question really is the skewness that is there in the deposit base than necessarily the transactional cycle itself,” Rahul Bajoria, MD and senior regional economist, Barclays, said.
Banks are now setting aside more of their extra funds in anticipation of payment obligations, which may occur beyond the earlier cycle.
“The issue with 24/7 banking is to do with the funding limits that individual banks have. Changes in CRR timing would help align balance sheet management according to when funds are auto swept from the RBI’s SDF window,” the bank treasury executive said.
Current Dynamics
Even as surplus liquidity in the banking system has surged over the last week due to heavy government spending and deposits of Rs 2,000 notes, banks remain circumspect about funding conditions going ahead.
This can be gauged from the participation at Friday’s 14-day reverse repo operation. Of the ‘2 lakh crore window offered by the RBI, banks parked funds worth only ‘50,868 crore.
