MUMBAI: Indian banks had limited appetite for borrowing from the central bank’s seven-day cash infusion operation on Tuesday, despite a narrowing in liquidity surplus, underscoring the need for more flexible options such as allowing prepayment, bankers said. The Reserve Bank of India infused 480 billion rupees ($5.2 billion) against an offer of 1.50 trillion rupees via the variable repo rate operation, in which banks compete for funds by quoting different rates. Liquidity surplus in the banking system, meanwhile, was at a seven-week low. Why it’s important The weak demand reflects a preference for very short-duration borrowing for flexibility. It signals that term funding, which is lending for longer than a day, is less attractive despite moderating cash surplus conditions. India’s forex reserves fall most in over a year on central bank’s rupee defence This was evident in late January, when the RBI managed to infuse 1.36 trillion rupees in a 90-day window after allowing banks to repay early. That helped keep banking system liquidity above 1% of deposits over the past one-and-a-half months. Such comfortable liquidity is considered essential for smooth policy transmission. Key quotes “The response to the repo clearly indicates that the demand for funds is very short-term. So from market’s point of view, the RBI should experiment with 7-day or 14-day repos with a prepayment option,” said A Prasanna, chief economist at ICICI Securities Primary Dealership. “Repos with flexible reversals work well for banks, especially right now. Prepayment option gives banks a safety net without trapping them in unnecessary borrowing for a larger period,” said VRC Reddy, treasury head at Karur Vysya Bank. By the numbers India’s banking system liquidity surplus dropped to around 750 billion rupees on Monday, which is just around 0.3% of deposits, down from an average of around 2.5 trillion rupees in the last one-and-a-half months.