Banking News

RBI lets banks decide call borrowing limits

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The Reserve Bank of India has allowed banks to set their own limits for borrowing in call and notice money markets, a move that would allow for greater dexterity in managing funds amid a more complex liquidity environment.

Prior to this, existing guidelines prescribed prudential limits for outstanding borrowing in call and notice money markets for scheduled commercial banks.

The call market is an uncollateralised avenue used by banks to meet short-term financing requirements. The weighted average call rate (WACR) is the operating target of the RBI’s monetary policy.

“With the current volatility in liquidity conditions, banks can plan liquidity management better and the LCR (liquidity coverage ratio) requirements will ensure that dependence on call borrowing is under check,” said Karthik Srinivasan, group head-financial sector ratings, ICRA.

In April-May, the call rate was often elevated due to skewed liquidity distribution and banks’ need to set aside more buffers for 24/7 banking.

The key benefit would be felt by banks for whom borrowing limits as a percentage of capital funds were proving to be insufficient, a treasury executive at a private bank said.BOOSTING VOLUMES
RBI’s new step could translate into healthier volumes in the call money market, in turn, preventing episodic swings in pricing benchmarks derived from the call rate such as the MIBOR (Mumbai Interbank Outright Rate). The MIBOR is the benchmark used for widely-used derivatives such as overnight indexed swaps (OIS).

At present, daily volumes in collateralised market segments such as tri-party repos and interbank repos far outstrip those in the call market. On Thursday, call money market volumes were at ₹10,565 crore, much lower than ₹2.8 lakh crore for tri-party repos and ₹1.8 lakh crore for repos.

LIQUIDITY MOP-UP, 24/7 BANKING
RBI commentary on Thursday suggested that the central bank would look to proactively absorb extra funds with banks in order to keep the WACR aligned to the repo rate of 6.50%. The liquidity surplus is currently at ₹2.2 lakh crore.

The central bank emphasised the need to anchor the overnight funding rate to the policy repo rate by taking out excess liquidity through reverse repo auctions. The variable rate reverse repo auctions, which the RBI announced on three consecutive days this week, have seen muted participation from banks.

“The reason for caution among banks is that there is an imminent advance tax outflow, which is always sizeable. But, as you saw, we were persevering in our efforts and the fact that we repeated our auctions indicated our purpose, which is what we wanted to convey,” RBI deputy governor Michael Patra said.

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