FIT And ASISO Frameworks Boosts Bank Reserve Optimisation: RBI Report

Mumbai, Dec 26 (KNN) A new report by Reserve Bank of India (RBI) staffers reveals that banks have optimised their daily reserve maintenance following the implementation of the flexible inflation targeting (FIT) framework in 2016 and the automatic sweep in sweep out (ASISO) facility in 2020. 

This optimisation has freed up additional resources for productive deployment while reducing reserve maintenance volatility.

The ASISO facility, introduced in August 2020, provides banks with enhanced flexibility in managing their day-end cash reserve ratio (CRR) balances. 

The system allows banks to pre-set specific amounts or ranges for end-of-day maintenance, with any deviations automatically triggering appropriate facility mechanisms, including marginal standing facility or standing deposit facility.

Under India's banking regulations, reserves must be maintained on a fortnightly average basis, with a specified percentage required daily during this period. This structure enables banks to effectively manage their daily liquidity needs while responding to unexpected cash flows without creating undue market volatility.

The report highlights that during the pre-FIT period, banks typically maintained reserves between 85 to 120 percent of requirements. This range has narrowed to 95-115 percent during the FIT period, with some exceptions. 

The study also notes that more banks now occasionally maintain reserves below 100 percent on certain days within the fortnight, indicating a more strategic approach to reserve management.

The implementation of these frameworks has led to reduced volatility in daily excess reserves maintained by scheduled banks as a proportion of net demand and time liabilities. 

This improvement is attributed to refinements in liquidity management and monetary policy operating procedures. 

Banks can now choose optimal reserve holding strategies based on their intraday cash flows and money market participation, the report concludes, demonstrating the effectiveness of the RBI's modernised approach to banking regulation.

(KNN Bureau)