The banking sector is expecting a potential tightening of cash conditions in the coming weeks, prompting calls for active management from the Reserve Bank of India (RBI) to maintain overnight cash rates near the policy rate, according to several market participants.

Despite the RBI's short-term cash infusions, the weighted average call rate, which serves as a benchmark for interbank borrowing and lending, has consistently remained above the repo rate of 6.50 per cent in recent weeks, indicating a liquidity deficit.

VRC Reddy, Treasury Head at Karur Vysya Bank, stressed on the need for nimble action from the central bank, particularly as the financial year-end approaches. He suggested that the RBI may need to provide additional funds through shorter-duration repos if spending levels do not pick up.

One proposal put forward by traders is for the RBI to adjust its repo auctions timing, potentially halting them shortly after the market opens to avoid ad-hoc auction announcements throughout the day.

Additionally, traders advocate for an increase in the quantum of repos, citing a decline in government spending as a contributing factor to the current liquidity shortage. Some traders have called for more proactive measures, such as pre-announcing repo infusions and increasing their size, considering that a significant portion of trading activity occurs within the first 90 minutes of the trading session.

However, traders acknowledge the challenges posed by the unpredictability of government spending, which complicates the implementation of long-term liquidity injections. Neeraj Gambhir, Head of Treasury at Axis Bank, highlighted the reluctance to introduce major measures due to this uncertainty.

Arun Srinivasan, Head of Fixed Income at ICICI Prudential Life Insurance, proposed a more radical solution, suggesting a gradual reduction in the Cash Reserve Ratio (CRR) by the RBI, similar to previous adjustments made to address excess liquidity.

(With Reuters inputs)