RBI Issues Revised Liquidity Management Framework

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.

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. Many times, banks borrow money for a very short time, primarily to manage day-to-day liquidity and meet regulatory norms.

The overnight WACR will continue to be the operating target of the monetary policy, according to the RBI's revised liquidity management framework.

The Reserve Bank of India will, however, continue to keep track of rates in other overnight money market segments to ensure orderly evolution of money market rates and smooth transmission, it added.

According to the framework, the existing symmetric corridor system is retained, with policy repo rate at the middle of the corridor and standing deposit facility (SDF) and marginal standing facility (MSF), which are 25 basis points on either side of the policy repo rate, acting as the lower bound (floor) and upper bound (ceiling) of the corridor, respectively.

"The Reserve Bank will endeavour to align the WACR to the policy repo rate by ensuring an optimum level of system liquidity using the instruments defined under this framework," it said.

In August, a report by the Internal Working Group (IWG) reviewing the Liquidity Management Framework was placed on the RBI website, and comments on the same were invited from stakeholders and the public.

The RBI said that based on the recommendations of the IWG and after considering the feedback received, the liquidity management framework has been finalised.

Further, the central bank said the 14-day variable rate repo (VRR)/ variable rate reverse repo (VRRR) operation will be discontinued 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 RBI based on its assessment of the system liquidity requirement.

"To reduce uncertainty in the market about the tenor, quantum and timing of the repo/reverse repo operations, the Reserve Bank will provide sufficient advance notice to market participants, at least by one day, while conducting any such liquidity operation," the circular on the framework.

However, when circumstances warrant, the RBI would conduct operations by announcing on the same day, it added.

Instruments under the extant liquidity management framework for managing durable liquidity, viz., 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.

Also, the current requirement of maintaining a minimum of 90% of the prescribed CRR on a daily basis will continue.