More Liquid Money In Banks? RBI LCR Rules May Change, Says Jefferies - What Does It Mean?

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

The Reserve Bank may also ease the proposal of tightening of the 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.

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

"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," the report said.

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 finance companies (NBFCs), according to the Jefferies report.

The new RBI Governor is expected to share insights into future policy direction and market participants are closely watching the upcoming Monetary Policy Committee (MPC).

According to the report, RBI is taking steps to address the liquidity crunch caused by dollar sales and foreign portfolio investor (FPI) withdrawals. The money market has slipped into a deficit of Rs 3 trillion despite a Rs 1 trillion liquidity infusion through a CRR cut in December 2024.

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, the report said.

To address this situation the RBI on Monday 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 relax liquidity conditions and stabilize rates, particularly ahead of the fiscal year-end when demand for liquidity typically rises.

The report highlighted that despite the 50 basis points CRR cut in December 2024, which released Rs 1.1 trillion into the system, tight liquidity conditions continue. 

(With ANI inputs)