India is planning to introduce a new monetary-policy tool in the coming financial year to better manage a banking system swimming in excess cash, people familiar with the matter said.
The so-called Standing Deposit Facility, or SDF, will help the Reserve Bank of India absorb surplus funds without having to provide lenders collateral in exchange, said the people, who asked not to be identified as they aren’t SDF, will help the Reserve Bank of India absorb surplus funds without having to provide lenders collateral in exchange, said the people, who asked not to be identified as they aren’t authorized to speak publicly. The Finance Ministry will discuss the plan with the nation’s banks at a meeting Friday, they said.
Indian banks were flooded with cash after Prime Minister Narendra Modi invalidated 86 percent of the nation’s currency in circulation late last year and mandated the worthless notes be deposited with lenders. Banks scrambled to park these funds with the RBI, forcing the central bank to raise the limit on a scheme it uses to mop up excess liquidity. The surplus, however, has persisted, restricting the RBI’s ability to intervene in currency markets at a time when the rupee is appreciating.
The pricing of the planned facility will be key to whether banks respond to it, said Asish Vaidya, head of trading at DBS Bank Ltd. in Mumbai.
The SDF will largely replace the Market Stabilization Scheme, which uses bonds issued outside the government’s regular borrowings to mop up liquidity, the people said. The government in December raised the scheme’s limit twenty-fold to tackle the deluge of funds.
Indian banks had about 3.8 trillion rupees ($58 billion) in surplus funds as of Wednesday, according to the Bloomberg Intelligence India Banking Liquidity Index.
In 2014, a panel led by RBI Governor Urjit Patel — who was at that time a deputy — had proposed the introduction of the SDF as part of measures to improve the monetary-policy framework. Patel took over as Governor in September. Finance Ministry spokesperson D.S. Malik couldn’t be immediately reached for a comment.