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The government's hefty cash holdings, now parked at the central bank, may soon be deposited at commercial banks, a move that would add liquidity to the banking system and make monetary policy more effective by making it easier for banks to cut lending rates.
Sources with direct knowledge of the matter said Finance Minister P. Chidambaram will soon decide on whether to auction government cash balances to commercial banks.
"This will help better manage bank liquidity. Also, the government stands to get better returns," an official said, declining to be identified because he was not authorised to speak to the media.
New Delhi had one trillion rupees held at the Reserve Bank of India at the end of last month, outside of circulation, and roughly twice the amount normally held there as it cuts back spending in order to contain its fiscal deficit.
