RBI retains call rate as policy anchor in liquidity management framework

The Reserve Bank of India (RBI) has retained the overnight weighted average call rate (WACR) as the operating target of monetary policy under a revised liquidity management framework, the central bank said in a release on Tuesday.

 

“The overnight WACR will continue to be the operating target of the monetary policy. The RBI will, however, continue to keep track of rates in other overnight money market segments to ensure orderly evolution of money market rates and smooth transmission,” the release said. As part of operational changes, the central bank will discontinue the use of 14-day variable rate repo (VRR) and variable rate reverse repo (VRRR) as the main tools for managing short-term liquidity.

 

 

In August, the RBI set up an internal working group to review the liquidity framework seeking to align market rates with the key policy rate to ensure effective transmission of monetary policy. The framework has been in place since February 2020. The group submitted its report, following which comments were invited from stakeholders and the public by August 29.

 

Under the revised liquidity framework, the RBI has also retained the existing symmetric corridor system, with the policy repo rate positioned at the midpoint. 

 

The standing deposit facility (SDF) and marginal standing facility (MSF) remain 25 basis points below and above the repo rate, respectively, serving as the floor and ceiling of the corridor.

 

The RBI will continue to aim to align the WACR closely with the policy repo rate by maintaining optimal liquidity in the banking system, using the full set of instruments under the framework.

 

The 14-day VRR and VRRR operations will be replaced primarily by seven-day operations, along with other operations of varying tenors, from overnight to 14 days, depending on the RBI’s assessment of liquidity needs.

 

To enhance transparency and reduce uncertainty around liquidity operations, the RBI will provide market participants with at least one day’s advance notice specifying the tenor, quantum, and timing of operations. In exceptional circumstances, however, it may conduct same-day operations without prior notice.

 

All instruments currently used for managing durable liquidity, such as open-market operations, long-term variable rate repos/reverse repos, and foreign-exchange swap auctions, will continue to be part of the framework.

 

The requirement for banks to maintain at least 90 per cent of their prescribed cash reserve ratio on a daily basis will remain in force. In addition, standalone primary dealers will continue to have access to the SDF, overnight reverse repo operations, and all repo operations, regardless of tenor.