Banks may alert RBI as rising funding costs sting amid sustained liquidity drainage
Banks are likely to make representations to the Reserve Bank of India (RBI) on sustained liquidity drainage that has pushed up funding costs for lenders despite unchanged policy rates for nearly a year. Liquidity has steadily declined with the central bank repeatedly stressing the primacy of maintaining price stability as Indian voters get ready to elect their next government this summer.
«Banks and other participants in bond and interest rate markets will send a representation on the issues on Liquidity Coverage Ratio (LCR) buffers and high cost of funds to the RBI,» a source told ET.
«This will be done next week, ahead of the policy statement on February 8,» the source said.
LCR refers to a post-global financial crisis norm that requires banks to maintain high quality liquid assets (HQLA) to meet 30 days of net fund outflows under conditions of stress.
HQLA are primarily made up of government securities, a buffer corpus banks are now dipping into to meet increasing demand for credit amid an increasingly evident liquidity deficit.
As on Friday, the liquidity deficit in the banking system was at ₹2.14 lakh crore.
Liquidity in the banking system has broadly remained at a deficit for the past five months, pushing up banks' costs of funds much above the RBI's policy repo rate, which is where the cost of funds should theoretically be.
The RBI has been maintaining tight liquidity to curb inflation, a politically sensitive metric that needs restraining, especially as the most populous country embarks on the biggest democratic exercise in the world to choose its government for the next five years. On Friday, the overnight call money rate, which represents banks' cost of funds, closed at 6.80%, far above the repo rate of
