RBI issues revised liquidity management framework; retains call rate as the operating target of the monetary policy

The Reserve Bank on Tuesday announced that it will continue to use the overnight weighted average call rate (WACR) as the operating target of the monetary policy. The Reserve Bank will, however, continue to keep track of rates in other overnight money market segments to ensure orderly evolution of money market rates and smoothen transmission, it said. WACR is the average interest rate at which banks borrow and lend funds to each other for a short period, typically overnight, in the inter-bank call money market.

Further, the existing symmetric corridor system - aimed at stabilizing overnight market rates - is retained with repo rate at the middle and standing deposit facility (SDF) and marginal standing facility (MSF) on either side of the policy rate, acting as the lower bound (floor) and upper bound (ceiling) of the corridor, respectively. The central bank also discontinued 14-day variable rate repo (VRR) and variable rate reverse repo (VRRR) operations as the main operation for managing short-term/transient liquidity. Instead, the same will be managed primarily through 7-day VRR/ VRRR and other VRR/VRRR 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, release said.

Instruments under the framework for managing durable liquidity, ie, open market operations (OMOs), long-term variable rate repo/reverse repo operations and forex swap auctions will continue to be part of the revised liquidity management framework, RBI?s release said. The current requirement of maintaining a minimum of 90 percent of the prescribed CRR on a daily basis will continue, and Standalone Primary Dealers (SPDs) will have access to SDF, overnight reverse repo operations, and all repo operations, irrespective of their tenor.

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