Govt may shift cash pile to commercial banks

The government’s hefty cash holdings, now parked at the Reserve Bank of India, may soon be deposited at commercial banks, a move that would add liquidity to the banking system and make it easier for banks to cut lending rates.

The government’s hefty cash holdings, now parked at the Reserve Bank of India, may soon be deposited at commercial banks, a move that would add liquidity to the banking system and make it easier for banks to cut lending rates.

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If commercial banks get the government’s funds, they will not have to offer higher interest rates to customers to wean deposit. This, in turn, will bring down their cost and nudge them to reduce lending costs to final home, auto and corporate borrowers.

Sources with direct knowledge of the matter said finance minister P Chidambaram would soon decide on whether to auction government cash balances.

New Delhi had Rs. 1 lakh crore at the RBI at the end of last month, outside of circulation, roughly twice the amount normally held there as it cut back spending to contain fiscal deficit.

What this shift can do

If commercial banks get the government’s funds, they will not have to offer higher interest rates to customers to wean deposit. This, in turn, will bring down their cost and nudge them to reduce lending costs to final home, auto and corporate borrowers.

Could also ease yields on interest rate swaps.

“If the government’s surplus funds come to banks in the form of short-term deposits, it will bring down lending rates,” said M Narendra, chairman and managing director of Indian Overseas Bank, a state-run lender.

Two years ago, an RBI panel had proposed to auction government cash balances to banks for better liquidity management. The finance ministry, however, had been reluctant to make public the government’s exact cash position.

With inputs from Reuters