Thursday , February 21 2019

The Government Explores a New Monetary Facility to absorb Excess Cash

The government is devising a new monetary mechanism to suck up massive cash deposits held with the banking system.


The government is trying hard to discover a new monetary facility (standing deposit facility) to absorb the excess cash in the banking system, told by Banikinkar Pattanayak in New Delhi. The concept was raised in a meeting of senior finance ministry officials with bankers on 24th March, Friday as revealed by the source. Post demonetization in November, there was an unusual outpouring in deposits which triggered the call for devising a new plan to reduce the excess cash flows. In the Meeting, they explored a facility which could suck up the extra cash in the banking sector at a rate lower than the repo rate, sources told.

The finance ministry, sent a letter to higher banking officials wherein it said “To provide a floor for the new operating framework for absorption of surplus liquidity from the system but without the need for providing collateral in exchange, it was recommended that a (low) remunerated standing deposit facility may be introduced, with the discretion to set the interest rate without reference to the policy target rate.”

The idea is to deposit the excess cash with the Apex Bank (RBI). The last February review says that the monetary policy board declared the repo rate unchanged at 6.25%, due to suspected risk in rising of inflation, with the RBI changing its stance from “accommodative” to “neutral”.

“It may be recalled that the expert committee to revise and strengthen the monetary policy framework of RBI in its report of January 2014 had recommended inter alia to support the operating framework by adding some new instruments to the toolkit of monetary policy,” the ministry said in the letter to the bankers, asking them to be present at the meeting.

Shaktikanta Das, Economic affairs secretary refused to talk much about the meetings which were chaired by him. Nothing can be predictable as of now, on how the mechanism would be and what the exact contours it consists of. A sudden rise of liquidity around Rs 4 lakh crore in March from Rs 2 lakh crore in January is witnessed following the note ban. This led Banks holding with massive cash deposits. Nevertheless, such a move can drive down bonds, as it can increase cash constricts in markets. According to the Financial Analysts, this mechanism might influence short-term market rates if the Central bank continues to suck up the extra cash at a lower rate than the repo rate. Further, it can result in the banks lowering their lending rates.

After the note ban, Banks have already lowered their lending rates by around 0.8 percentage point which resulted in the massive flow of liquidity.

Presently, the central bank has taken the initiative to regulate liquidity flow by virtue of the cash reserve ratio, repo and reverse repo, based on market rates.

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