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Mumbai , Dec. 2

THE Reserve Bank of India has made two suggestions to manage the excess liquidity in the system in the absence of adequate volume of Government securities to undertake "sterilisation" operations. These are creating a market stabilisation fund (MSF) and instituting a standing deposit facility.

At present, the RBI is neither permitted to borrow money from banks and pay interest on it nor issue securities. MSF and the deposit facility could overcome this problem, two working groups set up by the RBI have suggested.

According to the draft report of the working group released on Tuesday, the MSF could be created by floating new market stabilisation bills and bonds (MSBs). These instruments could be used in addition to the present Liquidity Adjustment Facility.

The fund account would be maintained and managed by the RBI. The maturity, amount, and timing of issue of MSBs may be decided by the RBI in consultation with the Government depending, among others, on the expected duration and quantum of capital inflows, and the extent of sterilising such inflows.

As the funds raised through MSBs would remain immobilised in the books of the RBI, it would not entail any redemption pressure on the Central Government at the time of maturity. As inflows raised through such bills/bonds will not enter the Consolidated Fund of the Central Government, the impact on the fiscal would be limited to the extent of interest payments on the outstanding bills, the report has said.

Under the standing deposit facility, banks will be permitted to place funds with the RBI at their discretion over and above the required CRR (cash reserve ratio) deposits. While CRR deposits are mandatory, standing deposits are optional.

According the working group, the interest rates on such deposits could be lower than the repo rate. The CRR rates, it is suggested, could be aligned with the deposit rates.

The group has also suggested delinking interest rates on CRR with the Bank Rate. "The remuneration of CRR (could) be delinked from the bank rate and placed at a rate lower than the repo rate," the draft report said.

According to the report, the remuneration of eligible cash balances at the bank rate is no longer justifiable. "With the substantial scaling down of CRR coupled with marked decline in overall interest rate structure in the economy and increasing liquidity needs of the participants in the wake of higher interlinkages among different segments of the market, the degree to which CRR has been impacting banks as an implicit taxation earlier is considerably less in recent times," the report has observed.

It has been suggested that pending amendments to the RBI Act, the apex bank Reserve Bank of India could explore possibilities of modifying the current CRR provision to accommodate a standing deposit-type facility for scheduled banks within its ambit that could achieve the same objective as a standing deposit facility.

"The interest rate on CRR may be aligned with the desired interest rate on the proposed standing deposit type facility," the report has said.

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Managing excess liquidity — RBI moots stabilisation fund, standing deposit facility

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