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RBI turns down banks' proposal to dip into 2% of SLR to meet short-term asset liability mismatch
April, 22nd 2011

Bankers urged the Reserve Bank of India (RBI) to allow them to dip into 2% of their SLR, or statutory liquidity ratio , of the mandated 24% to meet short-term asset liability mismatch. This was conveyed by treasury heads of select banks at a meeting with senior RBI officials early this week.

The meeting was called to discuss the Deepak Mohanty report on the operating procedure of the monetary policy, which was released last month. However, senior RBI officials turned it down on the grounds that banks had not even availed of 1% of the standing facility of net demand and time liabilities (NDTL) of the total SLR in the past. Bankers also discussed issues regarding RBI's preference to maintain liquidity in a deficit mode of 1% of the NDTL.

"During the meeting, RBI officials agreed that at times it would be difficult to maintain the liquidity deficit of 1% of NDTL, but efforts have to be made in that direction," said a treasury head present in the meeting. RBI felt that the transmission of the monetary policy hinged on regulating the liquidity in the system, and liquidity in excess of 1% could thwart the process of policy transmission.

"I do not see the possibility of liquidity getting into a surplus, but certainly we wanted to be less in a deficit than it is now because the deficit now is about 2% of NDTL and we thought that the more appropriate level would be 1%. That is where we would like to see it," Subir Gokran had told research analysts soon after the January policy.

However, bankers are sceptical on RBI's desire to keep liquidity in a preferentially deficit mode. The meeting was also attended by primary dealers and mutual funds. RBI made a presentation on the report to market players. The objective was to place the report before them for their feedback and have an inclusive discussion there on the possible points of contention.

The report proposes a single operational rate, which would be the repo rate and the reverse repo. It also suggests the repo-reverse repo rate corridor to be maintained at 100 bps and the base rate to be maintained at 50 bps below the repo rate. The banker also discussed how the base rate was no more operational , and therefore, needed to be scrapped.

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