RBI's New Liquidity Framework: What To Expect Ahead Of Central Bank's MPC Meet?

Ahead of Reserve Bank of India's (RBIs) monetary policy meeting next week, there's buzz about the possibility of a fresh liquidity framework with an intent to alter the liquidity absorbtion, and injection.

The expected launch of a revised liquidity management framweork would most likely priortise short-term liquidity, and provide banks higher rate of predictability on rates. This comes in the backdrop of RBI intracting with market parrticipants to get feedback on the same for the last three months, as per media reports. 

Key Changes Expected In RBI's Revised Liquidty Framework

1.  Liquidity linked to operation Net Demand and Time Liabilities

— The banks liquidity requirement can be decided in proportion to their total deposits (NDTL). 
— Liquidity distribution could become more equitable. 
— Higher competition in loan rates by top banks to increase, and FD and loan rates may surge in small banks.

Also read: You’ll Need Rs 3.5 Crore to Retire in India - Are You Prepared Yet?

2. 7 days VRR/VRRR operations rather than 14 days

— RBI can make liquidity operations more dynamic by shortening the time period.
— Faster response to market movements. EMI movement of floating rate could increase.

3. Return of fixed rate operations if needed 

— RBI could lend money at fixed rate in case of sudden liquidity stress or market instability. 
— Banks will get clarity in uncertainty.

4. Call Rate can remain the operating target 

— The interbank loan (call money) rate can remain the main policy indicator. 
— Stability in interest rates and ease of estimation.

The anticipated changes come at a time when market participants have been seeking greater transparency and stability in short-term funding costs. Meanwhile, the central bank has issued a new circular for co-operative banks.

This marks a decisive shift toward empowering co-operative banks with greater autonomy, provided they meet certain financial and governance benchmarks.