Banks park record Rs4,32,000 cr with RBI on Monday

Banks on Monday parked a whopping Rs4,32,000 crore of excess liquidity with the Reserve Bank of India's reverse repo window against the pre-demonitisation levels of Rs5,000 crore a day.

Net of borrowings by banks through liquidity window the surplus funds parked with the central bank stood at a record 4,00,000 crore on Tuesday as well, data released on Tuesday showed.

This is expected to continue for some time as more deposits of old notes flow into banks, stretching RBI's bond holding. The spike in the issue of bonds and a subsequent increase in the central bank's liability is likely to force RBI to rework policy measures to steady its balance sheet.

With the deluge in bank deposits following the government's demonetisation move, banks will continue to park more of excess liquidity with the central bank, which in turn will be issuing securities worth an equal amount.
RBI must have offered at least Rs4,00,000 crore worth of bonds to banks on Monday. This could continue for some time, with the possibility of an increase in parked funds as banks' deposits peak.

RBI could be exceeding the planned limit for issue of securities against banks' overnight deposits, which would then require the central bank to look urgently for policy measures to protect financial stability.

In normal times RBI sets aside bonds against government's cash balances, which, even during peak liquidity, could at the most be around Rs1,00,000 crore, say experts.

As of June 2016, RBI's total bond holding stood at around Rs7,00,000 crore. Now, with over 4,00,000 crore of bonds issued to banks, RBI's bond holding has been limited to around Rs3,00,000 crore.

As more deposits of old notes come into banks, they will increasingly tap this window, which will stretch RBI's bond holding.

This could lead to RBI raising the limit of cash holdings by banks against their deposits, which in turn would relax pressure on overnight parking of funds with the central bank.

The central bank may also issue bonds under market stabilisation scheme (MSS) to suck out the liquidity. The MSS provision for this year, however, is only Rs30,000 crore.

RBI needs to keep enough of government bonds, which are considered the safest class of assets and the highest rated financial instrument in a country.