Reverse repo and MSF should be RBI’S call: Report

Says MPC can decide on the repo rate

A recent RBI report has made a strong pitch to let the central bank decide on the reverse repo and marginal standing facility (MSF) rates, while saying the monetary policy committee (MPC) can decide on the repo rate.

Three members from the Reserve Bank of India (RBI), including the governor, are part of the six-member MPC.

The policy corridor is the gap between repo rate, at which the central bank lends to banks, and the reverse repo rate, at which liquidity is drained out.

An emergency liquidity borrowing facility is available called marginal standing facility (MSF) through which banks can borrow funds by paying 25 basis points above the repo rate.

The RBI was criticised when it cut reverse repo in an out-of-turn decision on April 17. Critics, including former governor Urjit Patel, had said this undermined the MPC.

According to the currency and finance report, which was released on Friday and which the central bank says is not its official view, the RBI must retain the freedom to tweak the reverse repo and MSF rate for liquidity management purposes.

These rates are linked to repo, and by deciding on the repo rate action, the MPC can effectively decide on the course of these rates as well, the report argued.

The report said “decisions involving a change in the reverse repo rate and the MSF rate and announcements thereof may be shifted out of the MPC resolution to the Reserve Bank’s Statement on Developmental and Regulatory Policies”. Additionally, the RBI should clarify for the purpose of anchoring expectations that in normal times it will work within symmetrical corridor with the MSF rate and the fixed rate reverse repo rate at prespecified alignment with the policy repo rate and that it “reserves the option of operating with an asymmetric liquidity adjustment facility (LAF) corridor in exceptional times”.

While the MPC must determine the policy repo rate required to achieve the inflation target, the policy rate itself is part of the LAF corridor.

The operating procedure of monetary policy is guided by the objective of aligning the operating target of monetary policy — the WACR (weighted average call rate) — to the repo rate through active liquidity management, consistent with the stance of monetary policy.