LIQUIDITY MANAGEMENT FRAMEWORK RECAST
RBI abolishes daily repo window
The Reserve Bank of India (RBI) on Thursday adopted a new liquidity management framework in which there would be no fixed daily liquidity injection operations, but the central bank would act whenever the banking system requires money.
The weighted average call rate (WACR) will remain the operating target of the monetary policy, the RBI said, which means it will ensure enough liquidity to anchor the call rate at around the repo rate. This means if the call rate inches above the repo rate, it would signal liquidity deficit and the RBI will bring its tools to infuse liquidity. Similarly, the call rate below the repo rate would mean the banking system has surplus liquidity. In that case, the RBI can operate to suck out the liquidity through its operations.
The liquidity management corridor will be retained at 50 basis points, which means the RBI can allow call rates to rise up to the marginal standing facility rate (currently at 5.40 per cent) and reverse repo rate (currently at 4.90 per cent), while the repo rate remains in the middle at 5.25 per cent.
“With the WACR being the single operating target, the need for specifying a one-sided target for liquidity provision of 1 per cent of net demand and time liabilities does not arise. Accordingly, the daily fixed rate repo and four 14-day term repos every fortnight being conducted, at present, are being withdrawn,” the RBI said.
“However, the RBI will ensure adequate provision/ absorption of liquidity as warranted by underlying and evolving market conditions — unrestricted by quantitative ceilings — at or around the policy rate.”
Instruments of liquidity management will include “fixed and variable rate repo/reverse repo auctions, outright open market operations (OMOS), forex swaps and other instruments as may be deployed from time to time to ensure that the system has adequate liquidity at all times,” the RBI said in its statement on Developmental and Regulatory Policies.
While getting rid of the 14day fixed repo, the RBI said it will operate a 14-day term repo/reverse repo operation at a variable rate that would be conducted to coincide with the CRR maintenance cycle. This would be the “main liquidity management tool for managing frictional liquidity requirements”.
Considering the banking system has a liquidity surplus of about ~4 trillion, the RBI will continue with the fixed rate reverse repo daily. But the 14day variable-rate repo and reverse repo auction will happen every reporting Friday.
The main liquidity operation would be supported by fine-tuning operations, overnight or longer, to tide over any unanticipated liquidity changes during the reserve maintenance period.
In addition, the RBI will conduct, if needed, longer-term variable rate repo/reverse repo operations of more than 14 days. It also introduced LongTerm Repo Operations for improving monetary transmission. These would be two repo windows for one year and three years, which can be used to raise up to ~1 trillion from the banking system.
Using this window, banks can borrow at the repo rate, and lend to customers. The new facility will be available from the fortnight beginning February 15.
Deputy Governor Michael Patra clarified that the longterm repo operations are not intended to replace OMOS.