RBI’s revised liquidity management framework retains call rate as operating anchor of monetary policy

Reserve Bank of India

The Reserve Bank of India (RBI) on September 30 released the revised liquidity framework and maintained the overnight Weighted Average Call Rate (WACR) as the operating target of the monetary policy.

The WACR is the average rate at which banks borrow and lend to each other overnight in the inter-bank call money market.

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, the central bank said in a statement.

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 revised framework was released based on the recommendations of Internal Working Group (IWG) and after considering the feedback received from various stakeholders.

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.