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The Reserve Bank of India (RBI) has constituted a Working Group to review the current operating procedure of monetary policy of the Reserve Bank,including the liquidity adjustment facility (LAF). The panel will review the operating procedure with respect to repo,reverse repo auctions; width of the interest rate corridor; and frequency and timing of reverse repo and repo auctions.
Interest rate corridor is the spread between repo rate (the rate at which the RBI infuses liquidity) and reverse repo rate (the rate at which liquidity is drained out).
The panel will be chaired by Deepak Mohanty,Executive Director of the Reserve Bank and will be represented by the concerned departments of the Reserve Bank,Indian Banks Association (IBA) and Fixed Income Money Market and Derivatives Association of India (FIMMDA). The group will also include external experts.
The proposed terms of reference of the Working Group include a survey of the operating procedures of monetary policy of major central banks,review of the current operating procedure of monetary policy in India,in particular,the Liquidity Adjustment Facility (LAF) and examining of the operation of the LAF with regard to width of the corridor and the frequency and timing of auctions.
It will also assess the role of the Bank Rate and examine the role of standing facilities,such as,the export credit refinance; and suggest changes to the current operating procedure of monetary policy in India in the light of international practices and domestic experience,with particular reference on whether there should be a corridor at all,whether its width should be fixed or variable under specified conditions and what instruments/mechanisms may be necessary to enable the corridor to function efficiently.
In recent years,the operating procedure of monetary policy has witnessed significant changes with the development of the money market and changes in liquidity conditions.
In the process,the LAF,introduced in June 2000,has emerged as the principal operating instrument for modulating short-term liquidity. Consequently,the repo and the reverse repo rates have become the key instruments for signalling the monetary policy stance. These instruments,along with others,such as,the cash reserve ratio (CRR),open market operations (OMO) and market stabilisation scheme (MSS),have served the Indian monetary and financial system well.
However,Indias increasing integration with the global economy,large volatility in capital flows and sharp fluctuations in government cash balances have posed several challenges to liquidity management by the Reserve Bank,particularly in effectively signalling the monetary policy stance. “Against this backdrop,there was a need to revisit the framework of the operating procedure of monetary policy As announced in the first Quarter Review of Monetary Policy for 2010-11,therefore,the Reserve Bank has now constituted the working group to review the framework of the operating procedure of monetary policy,” it said.
