The Reserve Bank will propose measures to reduce window dressing by banks, which tends to add to yearend liquidity pressures in the system. 

"We are discussing with bankers how to improve liquidity towards the yearend and not come to a path where banks are not willing to lend to each other," said RBI governor Raghuram Rajan at his post-policy media briefing in Mumbai on Tuesday. "The yearend should not be for something special to happen." 

Liquidity conditions tightened in March, partly because of yearend 'window dressing' by banks, the RBI said in its bi-monthly policy statement. The situation, however, has eased due to an extraordinary infusion by the Reserve Bank. 

Banks tend to shore up balance sheets for a variety of reasons. An analysis of RBI data shows deposit and credit figures have gone up by as much as 5% in the last reporting fortnight of the fiscal. This tends to reverse in the subsequent fortnights. Banks do this for different reasons. While some want to reduce the size of their riskweighted assets to qualify for lower capital requirement, others want to increase the size of their assets to meet government performance requirement. "What you see is the distortion in the incentive (structure). Distortions do affect variety of markets," Rajan said. 

For instance, the CD market became very tight in early February. The RBI then took pre-emptive steps to improve liquidity. "But in the longer term, we do not see the RBI in the business of bailing out the banking system with infusion of liquidity. So we have to change the incentive structure and we are thinking of a variety of ways," he said. 

Bankers, however, have their own defence. "Even on Saturday and Sunday, banks were open for government business. If there are inflow and outflows, we will need to match that position and ensure CRR is kept," said Arundhati Bhattacharya, chairperson at SBI. "And  that's why the window needs to be open."  (Economic Times)