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Flood of cash with Indian banks may prompt RBI to use new tool

Flood of cash with Indian banks may prompt RBI to use new tool

The Reserve Bank of India is running out of bonds to lend out. With the nation on lockdown, banks have parked an average of 7 trillion rupees ($92 billion) overnight with the RBI in the past week in return for bonds. That’s more than 70% of the securities held on the central bank’s books, according to the latest data.

The depletion has sparked talks about the RBI deploying the so-called Standing Deposit Facility, which will enable it to take in the money at a cheaper rate without offering collateral. The central bank was pushed closer to a similar situation in the aftermath of Prime Minister Narendra Modi’s shock cash ban on high-value currency in 2016 that left the banking system awash with cash.

“The securities that the RBI can offer as collateral are shrinking,” said Soumyajit Niyogi, associate director at India Ratings & Research Pvt. “They’ll have no option but to resort to SDF if this liquidity overhang continues.

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