Indian bank treasurers are requesting a small change to a regulatory requirement that could help reduce overnight interbank borrowing rate volatility. Currently, banks must maintain a cash reserve ratio (CRR) of 4.5% of their total deposit base, which has increased to about INR190tn ($12.18bn). But cash conditions in the banking system have tightened due to monthly tax outflows, among other factors, resulting in higher interbank borrowing costs, despite a banking system liquidity surplus of more than INR1tn. As such, banks are suggesting that advancing the time by which banks compute their CRR requirements from 11:59 p.m. IST to 5:00 p.m. IST, to match the overnight cash markets close, would give the banks a better view of their balances and prevent them from keeping large buffers. Additionally, banks suggest that more short-term regular repos and reserve repos would help with volatility.
Regulatory Tweaks Could Reduce Interbank Cash Market Volatility in Indian Banks
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