India calls banks to discuss new facility to drain cash

MUMBAI: India´s finance ministry has called bankers into a meeting on Friday to discuss setting up a new facility to absorb surplus cash in the banking system, according to a letter sent to heads of lenders seen by Reuters on Thursday.

The finance ministry wants to discuss implementing a new framework called a "standing deposit facility", the letter said, that would drain surplus cash at a rate lower than the repo rate without the need for any collateral.  The cash would be deposited with the Reserve Bank of India, and revives a proposal issued by the central bank in 2014 as another way to drain funds. If implemented, the plan would resolve a major headache facing Indian regulators: how to reduce a surge in cash deposits since Prime Minister Narendra Modi banned higher-value notes in November.  Those cash deposits have resulted in liquidity rising to around 4 trillion rupees ($61.13 billion) in March from 2 trillion in January.

That amount of cash had raised concerns about inflation at a time when the RBI is seeking to prevent rising prices by changing its policy stance to "neutral" from "accommodative.