India RBI is Said to Plan Sending New Liquidity Tool Proposal

  • Move comes amid change of guard at the finance ministry
  • Govt is said to be receptive of standing deposit facility

India’s central bank will submit a fresh proposal to the government for introducing a new liquidity management tool as it grapples with strong foreign inflows, people familiar with the matter said.

The decision to reconsider the so-called Standing Deposit Facility, or SDF, was taken at a meeting between the new Economic Affairs Secretary Subhash Chandra Garg and Reserve Bank of India Deputy Governor Viral Acharya on Monday, the people said, asking not to be identified as they aren’t authorized to speak publicly.

After a change of guard at the finance ministry with Garg taking charge from Shaktikanta Das, the government has eased its opposition to the new liquidity tool as absorbing flows with the existing set of instruments becomes challenging. The ministry had earlier opposed a proposal to introduce the tool on the grounds that it gave the central bank the discretion to set interest rates outside the purview of the monetary policy panel.

The central bank will submit details of how its proposes to implement the tool, the people said. The SDF doesn’t require the central bank to give any collateral to lenders when it mops up cash.

Flows has picked up pace as emerging markets continue to benefit from the U.S. Federal Reserve’s paced interest-rate increases. Overseas investors have bought 1.3 trillion rupees ($20.2 billion) worth of local bonds so far in 2017, according to depository data. Stocks have seen $8.5 billion worth of inflows. The central bank has been regularly intervening in the forex market to mop up inflows, according to Mumbai-based traders.

Finance Ministry spokesman D.S. Malik couldn’t be immediately reached for comment. A spokeswoman for the RBI didn’t immediately respond to an e-mail seeking comment.

Earlier this month, the RBI resumed the open market sale of bonds for the first time since October as it seeks to manage the excess banking liquidity. Liquidity has seen a large surplus since Prime Minister Narendra Modi’s surprise note ban in November, and though the excess has come off, it still remains far from RBI’s target of neutral cash in the system.

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