Muted demand for India’s RBI cash infusion signals need for flexible operations, analysts say

MUMBAI, March 17 (Reuters) – Indian banks had limited appetite for borrowing from the central bank’s seven-day cash infusion operation on Tuesday, despite a narrowing in ​liquidity surplus, underscoring the need for more flexible options such as allowing ‌prepayment, bankers said.

The Reserve Bank of India infused 480 billion rupees ($5.2 billion) against an offer of 1.50 trillion rupees via the variable repo rate operation, in which banks compete ​for funds by quoting different rates.

Liquidity surplus in the banking ​system, meanwhile, was at a seven-week low.

The weak ⁠demand reflects a preference for very short-duration borrowing for flexibility. It signals ​that term funding, which is lending for longer than a day, is less ​attractive despite moderating cash surplus conditions.

This was evident in late January, when the RBI managed to infuse 1.36 trillion rupees in a 90-day window after allowing banks to ​repay early.

That helped keep banking system liquidity above 1% of deposits over the ​past one-and-a-half months. Such comfortable liquidity is considered essential for smooth policy transmission.

“The ‌response to ⁠the repo clearly indicates that the demand for funds is very short-term. So from market’s point of view, the RBI should experiment with 7-day or 14-day repos with a prepayment option,” said A Prasanna, chief economist ​at ICICI Securities ​Primary Dealership.

“Repos with ⁠flexible reversals work well for banks, especially right now. Prepayment option gives banks a safety net without trapping ​them in unnecessary borrowing for a larger period,” said ​VRC Reddy, ⁠treasury head at Karur Vysya Bank.

India’s banking system liquidity surplus dropped to around 750 billion rupees on Monday, which is just around 0.3% ⁠of ​deposits, down from an average of around ​2.5 trillion rupees in the last one-and-a-half months.

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