India's central bank tightens liquidity after its rate hike, for the first time since 2013

The Reserve Bank of India (RBI) has followed this week’s interest-rate hike with tighter liquidity rules, Business Standard reported on 10 October.

What changes

• From the fortnight starting 16 October, banks must keep at least 99% of their required cash reserve ratio (CRR) balance with the RBI every day, up from 90%. The CRR itself stays at 3% of deposits on a fortnightly average.
• The RBI will sell ₹25,000 crore (about $3 billion) of government bonds through an open market operation on 13 October to absorb surplus cash.

The last time the RBI imposed the 99% daily requirement was July 2013, during the “taper tantrum” turbulence caused by the US Federal Reserve.

Why

On Wednesday the RBI raised its repo rate by 25 basis points to 5.50%, its first increase in two and a half years. But surplus liquidity — about ₹3.88 trillion parked with the central bank on 8 October — has kept the overnight call rate, the RBI’s operating target, on average 14 basis points below the repo rate since August. The new measures aim to push market rates up toward the policy rate.

Bankers told the paper the move reduces day-to-day flexibility, though the impact may be limited because most banks already keep more than 95% of their required balance.