“With regard to the standing facilities of the Reserve Bank under the LAF (Liquidity Adjustment Facility), we have noticed simultaneous high utilisation of both MSF (Marginal Standing Facility) and SDF (Standing Deposit Facility) by the banks,” RBI Governor Shaktikanta Das said while detailing the central bank’s monetary policy statement on Friday.
“We propose to address this situation and have decided to allow reversal of liquidity facilities under both SDF and MSF even during weekends and holidays with effect from December 30, 2023. It is expected that this measure will facilitate better fund management by the banks,” Das said, adding that the measure would be reviewed after six months or earlier if required.
The central bank’s latest step provides banks with the flexibility to borrow or lend out funds on weekends and holidays instead of borrowing heavily from the market or the RBI’s lending windows ahead of non-working days.
The RBI’s move comes after months of unusual liquidity distribution in the banking system, with lenders persistently storing large amounts of money in the central bank’s absorption facility, which offers the least remunerative rate of interest.
“Earlier there was no provision for an automatic sweep-in for banks’ funds during the weekend. Now the RBI will likely institutionalise that system to help banks to use funds that are otherwise locked up,” a source aware of the development said.
Banks have repeatedly pointed out that the possibility of large outflows occurring at any point in time due to the growing use of 24×7 payment modes like the National Electronic Fund Transfer (NEFT) that has prompted them to keep funds aside as a buffer instead of lending them out in the interbank call money market.
“Given the 24×7 fund transfer facility available for customers, banks face challenges on liquidity management over the weekend, when interbank markets are closed. Hence, as a matter of prudence they end up borrowing three-day funds in the inter-bank market and MSF window over the weekend,” said Karthik Srinivasan, group head-financial sector ratings at ICRA.
“With the proposal to reverse these three-day MSF and SDF facilitities, we expect the volatility in call money rates to reduce and the extent of balances used in MSF and SDF facilities over the weekend to also moderate,” he said. Following the move, banks could save on interest costs as the MSF borrowing is 25 basis points higher than the repo rate, analysts said. One basis point is 0.01%.
Ashima Goyal, external member of the Monetary Policy Committee, told ET last month that long-term ways to improve India’s call market include sorting out market microstructure issues, giving banks the confidence to lend out surplus funds and addressing the impact of heterogeneity among banks. “Markets also need to be confident that the types of liquidity droughts seen in the past will not happen,” she said.
