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The time has come to make amendments to the RBI Act so that the conduct of reverse repo and term reverse repo operations are completely non-collateralised, according to State Bank of India’s economic research report, ‘Ecowrap’.
As lending to the central bank has no credit risk, there is no need to provide government securities as collateral when a market participant places its funds with the RBI, the report said.
Further, the report underscored, as the RBI inventory of government papers is getting depleted and it is unable to increase the stock due to fiscal ramifications, a low remunerated standing deposit facility needs to be introduced. This will require amendment to the RBI Act and may replace reverse repo in the long run.
Also, as in other countries, it is perfectly justified to empower the Indian central bank to float its own securities, said Ecowrap.
Multiple benefits
Emphasising that complete non-collateralisation of reverse repo and term reverse repo operations will have multiple benefits, the report said: “First, non-receipt of government securities in reverse repo and term reverse repo will boost the overall demand for government securities for maintenance of requisite statutory liquidity ratio (SLR), since securities obtained under reverse repo are eligible for SLR.
“Second, this move might also ensure a lower supply of government bonds through less issuance of CMBs (cash management bills). Third, absorption of additional surplus liquidity at a lower rate through SDF (standing deposit facility) will pull down the entire interest rate structure.”
Ecowrap noted that, in particular, lower operative overnight rate, short-term rate and lower supply and generation of additional demand will bring down the yield of long-dated government bonds also, thereby pulling down the sovereign yield curve. This will also reduce the interest cost of RBI.
“We, however, would urge that there should not be any cap on amount of funds placed at the RBI window for reverse repo, rather it should be abandoned and SDF introduced,” said Saumya Kanti Ghosh, Group Chief Economic Adviser, SBI. “Capping the quantum of funds in reverse repo as was done in 2007 creates significant market distortions in the onshore rate pricing metric as well as the knock on impact on the FX pricing metric. These could be not beneficial for bank books.”
Cash with public
Ecowrap also noted that even as currency with the public has jumped significantly (this rise in currency in circulation may be due to a greater tendency among people to hoard cash amid the lockdown), reserve money has declined by ₹14,161 crore in the period from March 20 to May 1, with the decline of ₹1.62-lakh crore of ‘bankers deposits with RBI’. This may be due to the 1 per cent cash reserve ratio cut by the RBI, the report added.
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