RBI Monetary Policy Meeting: RBI To Issue Draft Circular Proposing Modification In LCR Framework

RBI Governor Shaktikanta Das in his first MPC meeting for FY25 announced modification in the LCR framework to avoid crisis situations for banks arising out of sudden rush for withdrawal of money by customers
RBI Monetary Policy Meeting
RBI Monetary Policy Meeting

Reserve Bank of India (RBI) Governor Shaktikanta Das on the concluding day of the monetary policy meeting (MPC) on April 5, 2024, announced no change in the repo rate and held the stance of focusing on ‘withdrawal of accommodation’ until inflation reaches the target of 4 per cent.

In this financial year’s (FY2024-25) first MPC meeting, Das announced to keep the repo rate unchanged at 6.50 per cent. Other rates, such as the standing deposit facility (SDF) and marginal standing facility (MSF) rate have also been kept unchanged at 6.25 per cent and 6.75 per cent, respectively. These rates are used to optimise the liquidity in the market and handle inflation.

Das said in a statement: “After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided by a 5-1 majority to keep the policy repo rate unchanged at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.”

However, he brought attention to the liquidity coverage ratio (LCR), which banks need to maintain to be able to face withdrawal pressure in the case of uncertain situations, and also proposed changes in it.

What Is LCR?

RBI implemented LCR in January 2015. The LCR framework is a mechanism for banks to maintain certain liquidity to handle any stressful situation. According to an RBI circular dated April 17, 2020, under LCR, banks are required to maintain high-quality liquid assets (HQLA) to meet ‘30 days’ net outgo under stressed conditions’.

RBI’s Announcement For LCR Framework

According to Das’ statement, technological advancements have made it easier for bank customers to withdraw and transfer money instantly from their accounts. However, at the same time it is also posing a challenge to the banks to deal with situations where if due to any reason, there is a sudden rush for withdrawal by large number of depositors at the same time.

RBI observed such situations in some areas last year, and has accordingly, decided to make changes to the current LCR framework.

“The recent episodes in some jurisdictions have demonstrated the increased ability of the depositors to quickly withdraw or transfer deposits during times of stress, using digital banking channels. Such emerging risks may require a revisit of certain assumptions under the LCR framework. Therefore, certain modifications to the LCR framework are being proposed towards facilitating better management of liquidity risk by the banks. A draft circular in this regard shall be issued shortly for comments of all stakeholders,” said Das.

According to the announcement, the circular will be issued soon, and stakeholders could provide their comments on the same.

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