RBI may ease LCR norms to help banks amid tight liquidity: Jefferies Report

Looks like the RBI might throw banks a lifeline by potentially relaxing those tricky Liquidity Coverage Ratio norms. The central bank is exploring ways to prevent banks from having to shift massive amounts of loans into government securities. Jefferies is suggesting some clever workarounds, like including Cash Reserve Ratio in liquid asset calculations. The whole financial ecosystem is eagerly waiting for the upcoming Monetary Policy Committee meeting to see what moves the RBI will make.

"We expect that RBI may also ease proposed tightening of LCR norms" - Jefferies Report

by ANI January 28, 2025 147 views

New Delhi, January 28: The Reserve Bank of India (RBI) may relax the Liquidity Coverage Ratio or LCR norms to inject additional liquidity into the banking system according to a report by Jefferies.

Key Points

1. RBI considering flexible LCR norms to prevent large loan-to-securities shift

2. Potential inclusion of CRR in liquid assets calculation

3. Addressing liquidity crunch through strategic monetary interventions

The apex bank may also ease the proposed tightening of LCR norms which in their current form may compel banks to shift about Rs 7 trillion from loans to government securities (G-Sec) or other liquid assets.

The report suggests that one option for RBI could be to include the Cash Reserve Ratio (CRR) as part of liquid assets calculation. This move could benefit banks as Indian banks already hold relatively higher liquid assets. Another approach could be to implement the new LCR norms in a staggered manner, giving banks more time to adjust.

It said "We expect that RBI may also ease proposed tightening of LCR norms that in current form can force banks to reallocate Rs7tn from loans to G-Secs or liquid assets"

Jefferies anticipated that the RBI may ease regulations and potentially focus on measures to improve liquidity and reduce rates in 2025, which would have a positive impact on banks and non-banking financial companies (NBFCs).

The market participants are closely watching the upcoming Monetary Policy Committee (MPC) meeting on February 7, where the new RBI Governor is expected to share insights into future policy direction.

The report highlighted that RBI is taking steps to address the liquidity crunch caused by dollar sales and foreign portfolio investor (FPI) withdrawals.

Despite a Rs 1 trillion liquidity infusion through a CRR cut in December 2024, the money market has slipped into a deficit of Rs 3 trillion. The liquidity deficit has been aggravated by FPI outflows worth USD 6 billion in the year-to-date period and a USD 34 billion drop in forex reserves over the last two months.

To address the situation on Monday the RBI has announced a Rs 1.5 trillion liquidity package, which includes open market operations (OMO), 56-day repos, and USD 5 billion USD/INR swaps.

These measures aim to ease liquidity conditions and stabilize rates, particularly ahead of the fiscal year-end when demand for liquidity typically rises.

The report noted that despite the 50 basis points CRR cut in December 2024, which released Rs 1.1 trillion into the system, tight liquidity conditions persist. Market participants are hoping for further clarity on LCR norms and other regulatory measures in the upcoming MPC meeting.

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