The Reserve Bank of India is getting tougher on extending unlimited credit to the country's banks to try to ensure they push interest rate cuts through the financial system and to stop them from making what one official called a "mockery" of its operations.
India's commercial banks readily borrow from the central bank at the policy rate but then lend that money out at a high rate, in what RBI Governor Raghuram Rajan describes as a culture of "lazy banking." The RBI argues this reduces the effectiveness of its monetary policy decisions and the cheap funding rates for banks are not passed on to retail and corporate borrowers at a time when the economy is only gradually recovering from a slowdown.
"They have made a mockery of our monetary policy transmission framework," said one official familiar with the RBI's thinking.
Another senior official with knowledge of the central bank's views said the RBI wanted to end a "whenever you want, you come" mentality that many lenders had regarding funding.
"It is not actually the responsibility of the central bank to always keep the tap open," he said.
An RBI spokeswoman did not have immediate comment.
Reducing banks' reliance on overnight funding from the central bank is a key part of Rajan's goal of reforming Indian money markets unveiled in January 2014.