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RBI Act to be amended to provide new liquidity management tool

RBI Act to be amended to provide new liquidity management tool

The government will amend the Reserve Bank of India Act to allow the central bank to suck our excess liquidity from the money market without offering any securities as collateral. 

This will provide the RBI a new tool in liquidity management particularly in times when the money market liquidity is in excess. The central bank has been demanding such a tool for a long time. However, the need for such a facility was particularly felt post demonetisation when RBI ran out of securities to offer as collateral and had to temporarily hike its cash reserve ratio (CRR) to force banks to park extra deposits with it. 

CRR is the amount of deposits that banks have to compulsorily with the RBI without earning interest. Currently that rate is 4%. However, the RBI had to ask banks to keep 100% of deposits accrued between September 16 and November 11 2016 as incremental CRR to deal with the avalanche of liquidity post demonetisation. 

Unlike CRR, deposits parked with the RBI through this new facility could earn banks interest.

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