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Banks (Finance)

RBI Allows Banks to Set Own Limits for Borrowing in Call and Notice Money Markets

Strategic Insights

— 1 min read

The Reserve Bank of India has relaxed its guidelines on borrowing in call and notice money markets, allowing banks to set their own limits. This move is expected to provide greater flexibility in managing funds in a more complex liquidity environment. The weighted average call rate (WACR) is the operating target of the RBI's monetary policy, and the new policy aims to ensure that dependence on call borrowing is under control. Experts believe that this move will enable banks to manage liquidity better and reduce their reliance on call borrowing.

Key Takeaways:

  • The RBI has allowed banks to set their own limits for borrowing in call and notice money markets, replacing existing prudential limits.
  • The call market is an uncollateralised avenue used by banks to meet short-term financing requirements, and the WACR is the operating target of the RBI's monetary policy.
  • The liquidity coverage ratio (LCR) requirements will ensure that dependence on call borrowing is under check, allowing banks to plan liquidity management better.
  • The new policy may lead to healthier volumes in the call money market, preventing episodic swings in pricing benchmarks like the MIBOR (Mumbai Interbank Outright Rate).
  • The RBI has suspended variable rate reverse repo auctions, citing the imminent advance tax outflow, and has instead emphasized the need to anchor the overnight funding rate to the policy repo rate.

Statistics:

  • The liquidity surplus in India is currently at ₹2.2 lakh crore.
  • The daily volumes in the call money market were ₹10,565 crores, whereas tri-party repos and interbank repos had daily volumes of ₹2.8 lakh crore and ₹1.8 lakh crore, respectively.
  • The RBI's new policy aims to ensure that dependence on call borrowing is under check, and the LCR requirements will play a key role in achieving this goal.
  • Prior to the new policy, the RBI's guidelines on borrowing in call and notice money markets were based on prudential limits.

Sources:

  • "RBI Allows Banks to Set Own Limits for Borrowing in Call and Notice Money Markets", The Economic Times.
  • Interview with Karthik Srinivasan, group head-financial sector ratings, ICRA.
  • Interview with a treasury executive at a private bank.
  • RBI commentary on Thursday.
  • RBI Deputy Governor Michael Patra's statement.

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