RBI working group suggests keeping repo rate close to call rates
27 September 2019
An internal working group set up by the Reserve Bank of India (RBI) to review the current liquidity management framework has suggested that the liquidity framework should be guided by the objective of maintaining the call money rate close to the policy rate.
The call money rate should be consistent with the policy rate and it should not undermine the price discovery in the inter-bank money market, it said.
It has suggested that the current liquidity management framework should largely continue in its present form -- a corridor system with the call money rate as the target rate.
The group suggested that the framework should be flexible. While the corridor system would normally require the system liquidity to be in a small deficit, if financial conditions warrant a situation of liquidity surplus, the framework should be adaptable, it said.
Minimising the number of operations should be an efficiency goal of the liquidity framework, the group said, adding that there should be ideally one single overnight variable rate operation in a day, supported by fine-tuning operations, if required.
The current provision of assured liquidity – up to 1 per cent of NDTL - is no longer necessary since the proposed liquidity framework would entirely meet the system’s liquidity needs.
Build-up of a large deficit or surplus, if expected to persist, should be offset through appropriate durable liquidity operations. In addition to OMOs and forex swaps, the group recommended longer term repo operations at market related rates.
The daily dissemination through money market operations (MMO) press release should be improved by including the ‘flow’ impact of liquidity operations. To improve transparency, quantitative assessment of durable liquidity conditions of the banking system may also be published.
The working group has been set up with a view to simplifying it and suggest measures to clearly communicate the objectives and prepare the toolkit for liquidity management.
RBI has placed the recommendations on its website for comments of stakeholders and members of the public. The final liquidity framework will be finalised taking into account the recommendations of the group and the public feedback.