Banks' liquidity dry-up was partly RBI's doing

The central bank is trying to address a market problem in which it too has played a role. The basic lesson: prudential norms for banks should be calibrated to suit our specific conditions

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The chickens are coming home to roost. That might seem an inappropriate statement to make in the context of a central bank. But it may uncannily be true of the Reserve Bank of India (RBI) today.

Why? Because the liquidity tightness of the past few weeks that it is currently trying to address is partly, though not entirely, the consequence of its own proposed new rules on the liquidity coverage ratio (LCR) of banks. In July 2024, RBI had suggested that banks assign an additional 5% 'run-off factor-broadly, the portion of deposits kept handy to cover a surge in withdrawals for retail deposits that can be accessed via internet and mobile banking.