RBI working group recommends that overnight Weighted Average Call Rate may continue as operating target of monetary policy

Reserve Bank had constituted an Internal Working Group (IWG) to review the extant Liquidity Management Framework which has been in operation since February 2020. The Group has submitted its report and the same is being placed on the RBI website today.

Here are the recommendations offered by the group:

The Group recommends that the overnight Weighted Average Call Rate may continue as the operating target of monetary policy. The Reserve Bank may, however, continue to keep track of rates in other overnight money market segments to ensure orderly evolution of money market rates and smoothen transmission. The Group recommends continuation of the existing corridor system with policy repo rate at the middle of the corridor.

The Group recommends that 14-day VRR/VRRR auctions may be discontinued as the main operation. Instead, the transient liquidity may be managed primarily through 7-day repo/ reverse repo operations and other operations of tenors from overnight up to 14-days at the discretion of the Reserve Bank based on its assessment of the system liquidity requirement.

To reduce uncertainty in the market about the tenor, quantum and timing of the repo/reverse repo operations, the Group felt that it is desirable for the Reserve Bank to provide sufficient advance notice to market participants, at least by one day, while conducting any such liquidity operation.

The Group observed that there may be situations in which the evolving liquidity conditions may warrant conduct of liquidity operations on the same day of announcement. The Group recommends that in such circumstances, the Reserve Bank may conduct repo/reverse repo operations announced on the same day.

The Group recommends continuation of variable rate auction mechanism for conducting repo and reverse repo operations under the LAF. Group recommends that the repo/reverse repo operations of appropriately longer tenor may be conducted through variable rate auctions.

The Group noted that instruments under the extant LMF are sufficient for meeting the durable liquidity needs of the system and hence, does not recommend any change at this stage.

The Group recommends the Reserve Bank to retain the extant daily minimum requirement of 90 per cent of the prescribed CRR.

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