Call money rates should be close to policy rate, says liquidity panel

‘Current liquidity management framework must continue’

Updated - September 26, 2019 10:56 pm IST

Published - September 26, 2019 10:28 pm IST - Mumbai

The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai, India, in this February 2, 2016 file photo. India is preparing to pump in a higher-than-anticipated capital sum into poorly performing state banks, government sources said, a move that could see New Delhi infuse as much as $34 billion additionally and make it harder to hit planned deficit targets.  REUTERS/Danish Siddiqui/Files

The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai, India, in this February 2, 2016 file photo. India is preparing to pump in a higher-than-anticipated capital sum into poorly performing state banks, government sources said, a move that could see New Delhi infuse as much as $34 billion additionally and make it harder to hit planned deficit targets. REUTERS/Danish Siddiqui/Files

An internal working group, formed by the Reserve Bank of India (RBI) to review the current liquidity management framework, has suggested that the framework should be guided by the objective of maintaining the target rate — that is, the rate in the inter-bank market for reserves — close to the policy rate.

The report said the the target rate is usually the rate at which reserves are borrowed or lent among banks, that is, the call money market rate in India.

“Towards this end, the framework should enable the central bank to be equipped with the required tools to inject and absorb liquidity at either fixed or variable rates, on an overnight basis as well as for longer tenors,” the report said.

The report 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.

Suggesting that the liquidity framework should be flexible, the report said 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.

“The current provision of assured liquidity — up to 1% of NDTL — is no longer necessary since the proposed liquidity framework would entirely meet the system’s liquidity needs,” it said.

In case build-up of a large liquidity deficit or surplus is expected to persist, it should be offset through appropriate durable liquidity operations, the report said.

In addition to OMOs and forex swaps, the group recommended longer term repo operations at market related rates.

All the stakeholders can send their feedback by October 31, RBI said.

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