 "Bank, money, Banks")
By Dharamraj Dhutia and Swati Bhat
MUMBAI (Reuters) - A slight tweak to a key regulatory requirement for Indian banks could help reduce volatility in the overnight interbank borrowing rates, senior bank treasurers said on Tuesday.
The weighted average interbank call money rate has been above the repo rate of 6.50% for five straight sessions despite the banking system liquidity surplus staying above one trillion rupees ($12.18 billion).
Banks are required to maintain a cash reserve ratio (CRR) of 4.5% of their total deposit base, which has risen to around 190 trillion rupees. But cash conditions in the banking system have tightened due to monthly tax outflows, among other reasons, keeping interbank borrowing costs on the higher side.
Advancing the time at which banks compute their CRR requirement from 11:59 p.m. IST to 5:00 p.m. IST to match with the overnight cash markets close will likely give banks better visibility of their balances and prevent them from keeping substantial buffers, the bankers said.
"In today's scenario, a surplus of 750 billion rupees to one trillion rupees is considered as neutral liquidity, as this money will not be used for lending in markets and banks keep it aside to meet potential outflows," said a treasury head of a state-run bank.
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Conducting more fine-tuning operations and more regular shorter-tenor repos and reserve repos would also help with volatility, the treasury officials added.
The Reserve Bank of India (RBI) should also de-stigmatise borrowing by banks at the Marginal Standing Facility (MSF) window, they said.
The RBI introduced the MSF borrowing facility for commercial banks for emergencies. But most state-run banks are reluctant to borrow from it as bank boards are notified and it can come up at audit meets.
This pushes banks to either keep additional funds or borrow at higher rates in the interbank market.
"When MSF was introduced, it was a penal rate. But back then banks had the option of daily repo borrowing, which is not part of the new liquidity framework and MSF is the only option left," a senior treasury official at a large private bank said.
($1 = 82.1023 Indian rupees)
(Reporting by Dharamraj Dhutia and Swati Bhat; Editing by Janane Venkatraman)
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