The Reserve Bank of India has cut the repo rate by 125 basis points since February 2025, but the benchmark 10-year yield remains close to last year’s levels. Banks have also struggled to reduce lending rates as deposit growth has lagged credit demand.
The RBI is widely expected to keep rates unchanged on Friday.
Despite the RBI’s record liquidity injections, banks remain short of funds as the central bank’s FX interventions have absorbed a large amount of rupee liquidity. This makes lenders reluctant to replace government bonds sold through open market operations, keeping yields elevated.
Banks are, therefore, seeking a delay in liquidity coverage ratio norms (LCR), due from April 1, and greater flexibility to shift bonds between held-to-maturity (HTM) and trading portfolios, the treasury officials said, declining to be identified as they are not authorised to speak to the media.
Lenders also want part of the cash reserve ratio (CRR) to count as high-quality liquid assets, permission to raise longer-tenor bulk deposits, and the continuation of debt purchases, they said.
The suggestions have been made in meetings with the RBI over the last few days, the officials added.The central bank did not respond to a Reuters email seeking comment.
Revised LCR rules have compounded banks’ funding pressures. The rules, which come into effect from April 1, require banks to maintain a buffer of 2.5% on digitally-linked deposits, which treasury officials have suggested be delayed.
Bankers say some regulatory leeway on LCR could ease pressure by pushing back the implementation date.
Treasurers are also asking for more flexibility to sell securities from their held-to-maturity portfolios beyond those tendered via open market operations.
Since April 2024, the central bank has tightened investment rules, requiring banks to get board and RBI approval to sell securities from these portfolios, where securities are not marked to market prices.
Traders say this has made banks, especially state-run ones, reluctant to buy bonds aggressively, which has contributed to the recent rise in yields.
Banks keep 3% of their total deposits with the RBI as CRR and want a part of that to count as high-quality assets, another kind of buffer that banks are required to hold.
“Currently, banks are permitted to issue CDs of up to one-year maturity. There is continuous rollover pressure and with rise in short-term rates, banks’ asset-liability management (ALM) gets impacted,” said Neeraj Gambhir, executive director – treasury, markets and wholesale banking products, Axis Bank.
Allowing banks to issue up to three-year certificates of deposits (CD) will help banks with better asset-liability management, he said.