Banks have conveyed their concerns regarding persistently high overnight prices and liquidity conditions to the Reserve Bank of India (RBI) to ensure equal access to money and reduce the widening gap between the benchmark policy and overnight rates.

Lenders and other participants in money markets had held discussions that highlighted the changing nature of liquidity distribution in the banking system wherein some entities could access funds only at elevated rates.

Market sources said the RBI has been requested by self-regulated market institutions to step in to bring overnight rates closer to the benchmark policy repo rate. "Banks have said that just looking at the extra funds parked with the RBI does not provide a true picture of the liquidity surplus," said one of the debt market sources cited above.

Impact of 24x7 banking

"It is not only that liquidity distribution is skewed toward large banks, but that a larger overall surplus is also needed to keep the call rate close to the repo rate," said the source.

Separately, call rates have climbed due to the demands put on the system by 24x7 banking.

"Factors such as 24/7 banking have resulted in banks keeping away cash at the RBI's Standing Deposit Facility (SDF). This means that when banks short of cash go to the call market, the rates are higher," said the source cited above.

The call money market is a route for lenders to meet overnight financing requirements.

Repo threshold breached

For around a month now, the weighted average call rate (WACR) has been around 25 basis points higher than the benchmark policy repo rate, which is currently at 6.50%. As a result, market-determined benchmarks, such as the Mumbai Interbank Outright Rate (MIBOR) and tri-party repos, have also been elevated.

The WACR is the operating target of the RBI's monetary policy.

"The liquidity framework released in 2020 includes provisions for fine-tuning repo operations by the RBI to keep the market rates close to the policy rate. At the current juncture, the RBI perhaps wants banks to manage their cash flows in a more nimble fashion, but the fact that overnight rates have been high for a month now is a concern and that has been expressed," another source said.

The RBI has not announced variable rate repo operations since March. The central bank injects liquidity into the banking system through such operations.