Indian Banks Advocate for Reinstatement of Daily Overnight Borrowing Window to Enhance Liquidity
Indian banks have formally requested the Reserve Bank of India (RBI) to reinstate the daily overnight borrowing window as a means to improve day-to-day liquidity management. The demand comes amid growing challenges in managing cash flows efficiently under the current liquidity framework, which is centered on 14-day variable rate repo operations.
Banks Cite Operational Challenges
Under the existing system introduced in February 2020, banks are expected to forecast their liquidity needs over a 14-day period and participate in fortnightly auctions. However, the rise of 24×7 banking services, digital transactions, and real-time settlements has made it difficult for banks to predict liquidity needs with precision. Sudden outflows and large intraday transactions have heightened the demand for a more responsive mechanism.
Bankers argue that the absence of a daily overnight borrowing facility limits their ability to respond to unanticipated liquidity shocks. Reintroducing a daily window, they say, would provide the flexibility required to manage liquidity efficiently in real time.
A Step Toward Better Monetary Transmission
A daily overnight borrowing window is seen as a critical tool for smoother transmission of monetary policy. When banks have better access to liquidity, changes in the repo rate and other monetary signals can more swiftly reach end consumers through interest rates on loans and deposits.
The move is also expected to curb volatility in short-term interest rates, which have recently been under pressure due to tight banking system liquidity. This would help maintain market stability and ensure consistency with the central bank’s monetary stance.
RBI’s Upcoming Policy Review in Focus
The banking sector’s demand is likely to be a key discussion point in the RBI’s upcoming monetary policy review. While the central bank has emphasized its preference for a predictable and structured liquidity management framework, growing industry feedback could prompt a reconsideration of certain tools.
As banks await the RBI’s response, the restoration of the overnight borrowing window could signal a return to more adaptive, market-aligned liquidity practices—balancing stability with operational flexibility in a rapidly evolving financial environment.
