Banks parking funds with RBI via Reverse Repo || Reverse Repo Rate trend

Banks have turned risk-averse amid economic crisis related to lockdown. “Even if banks would be earning less at reverse repo, they have decided to keep their options closed.’’

RBI’s surplus liquidity stance to ensure that banks lend is becoming ineffective at a time when the economy is in a total lockdown to fight Covid-19. The funds that RBI gave both through a cut in cash reserve ratio (CRR), the portion of deposits banks keep with RBI, and additional liquidity measures are finding their way back into RBI through reverse repo. While demand for credit is muted, banks are reluctant to lend to the companies that may have already availed moratorium.
Recently banks parked Rs 7.05 lakh crore via reverse repo auction with the central bank, show data compiled by India Ratings. While most of it is kept at a fixed rate of 3.75 per cent, the rest is through variable reverse repo. The previous high was at Rs 7.31 lakh crore on March 31, 2020.

• Why RBI is not capping parking limit, nudging lenders to look for alternatives instead of idle money.
• Why this unrealistic approach, knowing that the banks have their own money in reverse repo with RBI which they are not lending, why would they take additional money and lend to mutual funds or NBFC’s?
• Provide financing for NBFCs without the RBI directly buying their paper (The US Fed is directly buying commercial paper, for instance, but RBI is using a pass-through vehicle like TLTRO and keeping the credit risk at the bank level) An NBFC can issue bonds and get cash, and the subscribers will be banks through the TLTRO money.

As major economies begin to reopen, markets will keenly watch how successful they are, with a second wave of virus spread being the key risk.

Posted on May 26, 2022 by S T
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