Repo rate should be benchmark, says RBI panel
16 Mar 2011
A Reserve Bank of India panel has recommended making the repurchase rate, its main lending rate, the single policy rate to improve monetary policy transmission.
In a report made public on Tuesday, it also suggested maintaining a deficit in banking system liquidity to ensure that banks continue to borrow from the central bank at the repo rate, making it the operational rate at all times.
The panel, headed by RBI executive director Deepak Mohanty, was constituted by the central bank in October last year to review the prevailing operating procedures of monetary policy.
The central bank currently uses two rates - the repo rate and the reverse repo, its main rate for borrowing from other banks - to manage monetary policy, depending on the liquidity situation.
When liquidity is surplus, banks lend excess funds to the RBI, making the reverse repo rate the operational rate. But when banks are short on cash, they borrow overnight funds from the RBI, making the repo rate operational.
This, however, creates confusion and poses a challenge for the RBI to clearly articulate the stance of monetary policy, particularly when liquidity turns surplus or deficit within a short period.
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