RBI's new cash tool proposal to face opposition from government

The Reserve Bank of India (RBI) has proposed a new liquidity tool that would help manage a banking system, which is flooded with surplus cash. However, the government is opposing the proposal, as per reports.

The government is worried about the so-called Standing Deposit Facility (SDF) giving RBI the discretion to set an interest rate outside the purview of the monetary policy panel.

Not only this, SDF rate could also become the main operative measure in times of excess liquidity, if the proposal is accepted, said sources requesting anonymity.

Also read: 6 reasons why the RBI kept repo rate unchanged for the third time in a row

The apex bank, on its part, has recommended that SDF will allow it to mop up extra funds without the need of providing lenders any collateral in exchange.

Presently, the Market Stabilization Scheme (MSS) uses bonds issued outside the government’s regular borrowings to suck out liquidity, but SDF seems to be an option for MSS.

It was after the government’s demonetisation drive, which banned 86% of the nation’s currency that Indian banks had excess of cash with them. With banks rushing to deposit these funds with the RBI, it was forced to raise the MSS limit.

Also read: Remonetisation substantially completed, will expand tax base: Jaitley

The remaining surplus has restricted the RBI’s ability to intervene in currency markets, as rupee surges in the international markets.

Officials from the government and the central bank are holding meetings but have not yet reached to any decision.