Informist, Thursday, Feb 22, 2024

--MPC Goyal: Money market timings can be extended 
--MPC Goyal: Toolkit to manage liquidity conditions can be expanded 

--MPC Goyal:Adequate liquidity key to avoid illiquidity raising costs 

--MPC Goyal: Credit default costs push NBFCs to hold excess liquidity 
--MPC Goyal: Banks tend to hoard liquidity if it is tight 
 

MUMBAI – Monetary Policy Committee External Member Ashima Goyal said that while the weighted average call rate has exceeded the repo rate in the past few months, the central bank must come up with measures to ensure that the rate stays closer to the policy repo rate of 6.50% going ahead, minutes from the domestic rate-setting panel's February meeting showed.

"Measures to ensure the WACR (weighted average call rate) largely stays at the repo rate are required," she said. "These would also bring down short rates and are part of the natural development of the liquidity adjustment framework that supports inflation targeting." The external member had made similar suggestions in the minutes of the December policy review as well.

RBI officials including Governor Shaktikanta Das and Deputy Governor Michael Patra, both in the MPC, had said at the post-policy press conference that the central bank was looking to keep overnight rates close to the repo rate. The weighted average call rate has tended towards the marginal standing facility rate of 6.75% since the policy outcome on Feb 8, on every weekday except for Wednesday and today, when it declined to 6.55%.

The weighted average call rate has stayed near the marginal standing facility rate of 6.75% since August, during which time the central bank largely has relied on variable rate repo and reverse repo operations to actively manage the weighted average call rate. The RBI toolkit to counter the unprecedented build-up of government cash balances, and other large liquidity shocks, can be activated and expanded, she said.

Among her suggestions was the adoption of the just in time mode for cash management, staggering government borrowing to save interest rate costs. Currently, the government borrows according to two half-yearly calendars announced in March and September for the next six months. Goyal also suggested the extension of money market timings and the development of a market microstructure to enable banks to lend to each other.

Banks hoard funds when liquidity is tight, leaving nonbank financial organisations without a lender of last resort and forcing them to hold excess cash, she said. This leads to large chunks of credit not getting serviced, Goyal said.  

While macroprudential tightening pre-emptively reduces balance sheet stress, it could also lead to financial instability in some cases. Illiquidity could raise costs, stressing the balance sheet and turning into insolvency, she said. Banking system liquidity has remained in a deficit of over 1 trln rupees since mid-December.

"A major reason the Silicon Valley Bank collapse was not followed by others was the broad liquidity support the Fed made available to stressed financial institutions even as it continued with quantitative tightening," Goyal said. After facing losses on its investment book, Silicon Valley Bank had gone bankrupt on Mar 10 last year after a run on its deposits from technology companies in California. It was the second-largest bank to collapse in the US. 

End

Reported by M.C. Adhiinthran

Edited by Maheswaran Parameswaran

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