•  Indian banks have urged the RBI to revert to overnight liquidity tools and relax CRR norms to ease funding pressures.
•  They proposed fixed-rate daily repos and lowering daily CRR maintenance from 90 percent to 80-85 percent or 70 percent.
• These changes aim to improve liquidity, boost lending, and support economic growth.

Indian banks are asking the Reserve Bank of India (RBI) to return to overnight liquidity management operations and requesting a relaxation of the cash reserve ratio (CRR) requirements to alleviate funding pressures. This appeal was made during a meeting on Wednesday, where the central bank consulted with various lenders to receive input on its existing liquidity management framework. This meeting marked the RBI's second such engagement in less than two months, following a comparable discussion in April.

Since 2020, the RBI has primarily relied on the 14-day variable rate repo to lessen banks’ dependence on the central bank and to promote better liquidity planning. However, starting from mid-January, the central bank has been injecting funds into the system daily, suggesting that lenders have increasing short-term liquidity requirements.

Reports indicate that while opinions varied on bringing back the overnight rate, there was a general agreement among banks that the RBI should provide fixed-rate overnight liquidity instruments rather than the current longer-duration repos. Additionally, banks have recommended establishing a fixed-rate daily repo facility linked to a percentage of their deposit base to facilitate easier access to short-term funding.

"While participants were divided over operating the overnight rate, there was consensus that the RBI should move to fixed rate overnight liquidity instruments instead of longer duration", as per the report.

Moreover, banks have requested more flexibility regarding CRR maintenance. Presently, banks must maintain 90 percent of the required 4 percent CRR daily. Lenders have proposed reducing this daily requirement to between 80 percent and 85 percent, with some market participants suggesting an even lower threshold of 70 percent. They assert that such adjustments would enhance daily liquidity and allow banks to lend more assertively.

If these proposals are adopted, they could foster more sustainable and efficient funding within the banking system, potentially accelerating credit growth and benefiting the wider economy. Over the past six months, the RBI has already injected over $100 billion into the financial system through CRR modifications, foreign exchange swaps, and government bond acquisitions. All sources requested anonymity, as they are not authorized to speak to the media. The RBI has not yet issued a formal comment regarding the proposals.