A cautious approach by banks has emerged in response to the central bank’s latest liquidity move, signaling changing preferences in short-term funding. Despite a tightening liquidity surplus, Indian banks showed limited interest in borrowing through the latest cash infusion window, pointing to the need for more flexible options.
Reserve Bank of India infused ₹48,000 crore ($5.2 billion) through a 7-day variable repo rate operation against an offered ₹1,50,000 crore. In this process, banks bid for funds by quoting rates. At the same time, liquidity surplus in the banking system dropped to a 7-week low, reflecting tighter conditions.
Analysts say the muted response shows banks prefer very short-duration borrowing for flexibility rather than locking into term funding. Earlier in late January, the central bank infused ₹1.36 trillion through a 90-day window after allowing early repayment. This move helped maintain liquidity above 1% of deposits over the past 1.5 months, which is considered important for smooth transmission of monetary policy.
“The response to the repo clearly indicates that the demand for funds is very short-term. So from market’s point of view, the RBI should experiment with 7-day or 14-day repos with a prepayment option,” said A Prasanna, chief economist at ICICI Securities Primary Dealership. “Repos with flexible reversals work well for banks, especially right now. Prepayment option gives banks a safety net without trapping them in unnecessary borrowing for a larger period,” added VRC Reddy, treasury head at Karur Vysya Bank.
Data shows liquidity surplus fell to around ₹750 billion on Monday, about 0.3% of deposits, compared to an average of ₹2.5 trillion over the past 1.5 months. The trend highlights the need for more adaptive liquidity tools to match evolving banking system requirements.
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