View: Will RBI squeeze banks with an open market operation?
RBI. Its ripples have not dampened the festive spirit as the world beyond the money market is oblivious to the cryptic war of words. For most, little has changed: the businessman is not charged a higher rate on loans, the homebuyer is paying the same EMI, and stock traders are fine with governor Shaktikanta Das leaving interest rates untouched. However, the rift has left bankers dealing in the more obscure bond market baffled and angry.
The dense drama has laid open RBI’s dilemma and the confusion of the bond brigade. The protagonists are an affable governor who wants to tame inflation without hiking interest rates, particularly amid festivities, his articulate, pony-tailed deputy, Michael Patra, who has to justify RBI’s actions, words, and silence, and bankers who lend and borrow to manage liquidity while taking cues from the market, rivals and RBI to price loans and deposits.
At the heart of the debate is how banks handle their daily surplus or deficit liquidity vis-à-vis how RBI wants them to do it. While RBI wants banks to manage liquidity without undermining the monetary policy framework, they prefer doing what is convenient. There is no middle ground with bankers arguing that the market has transformed, and RBI must adjust to the new realities.
What has changed?
- A 24/7 payment system allows anyone to move any money at any time, including weekends.
- A large monthly outflow of GST. Banks say these swings in money flows require them to have a firmer grip on liquidity, which cannot be achieved with earlier liquidity management techniques that RBI wants them to stick to.
Banks can park surplus money with RBI for 14 days at what is called the variable reverse repo rate (VRRR). RBI had made it clear that VRRR
