The Reserve Bank of India (RBI) panel on Tuesday recommended that the repo rate should be the single policy rate to unambiguously signal the stance of monetary policy to achieve macroeconomic objectives of growth with price stability.
“It will operate within a corridor set by the Bank Rate and the reverse repo rate. As the repo rate changes, the Bank Rate and the reverse repo rate should change automatically,” the RBI panel stated in its ‘Report of the working group on operating procedure of monetary policy'
The repo rate is the rate at which banks borrow from the central bank and the reverse repo rate is the rate at which banks park their funds with the RBI.
While these are short-term indicative rates, the Bank Rate is a long-term indicative rate.
The group recommended that the Bank Rate be activated as a discount rate with a spread over the repo rate. Once the policy rate changes, the Bank Rate should change automatically with a fixed spread over the repo rate.
The Bank Rate has not been changed since April 2003 when it was last revised to 6 per cent, even as the policy rates have moved in either direction quite significantly. “Thus, for all practical purposes, the Bank Rate as an instrument of monetary management has become dormant,” the panel stated.
The liquidity adjustment facility (LAF) with some modifications should be the key element in the operating framework of the Reserve Bank and the modified LAF should operate in a deficit liquidity mode and the liquidity level should be contained around plus or minus one per cent of net demand and time liabilities (NDTL) of banks for optimal monetary transmission, it said.
The RBI at its discretion could conduct simultaneous auctions for longer period if the liquidity situation so warrants.
However, such actions should be at variable prices as they will be purely for liquidity management rather than for signalling the policy rate.
