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RBI looking to deposit cash into banks

RBI looking to deposit cash into banks

(30 April 2013 – India) Media reports in India are suggesting the government is looking to deposit cash into commercial banks, a move that will add liquidity and make it easier for banks to cut lending rates.

The Reserve Bank of India (RBI) held some one trillion rupees (A$18 billion) in March.

This total is outside of circulation and is twice the amount normally held by RBI, which cut back spending to contain its fiscal deficit.

Analysts said keeping that huge amount out of the banking system has created a liquidity deficit that has forced banks to borrow as much as US$29.4 billion from the central bank to meet daily funding needs.

Finance Minister P Chidambaram will soon decide on whether to auction government cash balances now held by RBI to commercial banks. The government currently keeps all its surplus cash with the central bank.

This massive borrowing is far above RBI's comfort zone of US$11 billion, forcing the central bank to buy bonds and pump money into the banking system through open market operations.

Moving the government’s cash holdings to commercial banks could also ease yields on interest rate swaps.

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