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RBI announces tweaks in liquidity management framework

RBI kept repo rate unchanged at 5.5% for the second consecutive time after it reduced policy rates by 135 basis points in five consecutive reviews last year

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RBI announces tweaks in liquidity management framework
RBI policy: The apex bank listed several measures to fine-tune the existing liquidity management framework which would help in improving credit flows to certain sectors

Reserve Bank of India (RBI) on Thursday announced key measures to revive subdued economic growth while announcing its monetary policy today. RBI kept repo rate unchanged at 5.5% for the second consecutive time after it reduced policy rates by 135 basis points in five consecutive reviews last year.

Also read: RBI revises Q4 CPI inflation target to 6.5%

The apex bank listed several measures to fine-tune the existing liquidity management framework which would help in improving credit flows to certain sectors, reinforcing monetary transmission, strengthening regulation and supervision, broadening and deepening financial markets, and improving payment and settlement systems.

Here's a look at key elements of the revised framework:

  • RBI said liquidity management is the operating procedure of monetary policy. Weighted average call rate (WACR) will continue to be the operating target of monetary policy.  This is the first leg of monetary policy transmission to the financial system and economy.  
  • The apex bank retained liquidity management corridor, with the marginal standing facility (MSF) rate as its upper bound (ceiling) and the fixed rate reverse repo rate as the lower bound (floor), with the policy repo rate in the middle of the corridor.
  • The width of the corridor is unchanged at 50 basis points - the reverse repo rate being 25 basis points below the repo rate and the MSF rate 25 basis points above the repo rate, said RBI.
  • The Reserve Bank 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.
  • To ensure adequate liquidity at all times, RBI's instruments of liquidity management will include fixed and variable rate repo/reverse repo auctions, outright open market operations (OMOs), forex swaps and other instruments.
  • RBI said its main liquidity management tool for managing frictional liquidity requirements will be a 14-day term repo/reverse repo operation at a variable rate and conducted to coincide with the cash reserve ratio (CRR) maintenance cycle.
  • The bank would carry out fine-tuning operations, overnight and/or longer, to tide over any unanticipated liquidity changes during the reserve maintenance period.
  • If needed, Reserve Bank will conduct longer-term variable rate repo/reverse repo operations of more than 14 days.
  • The apex bank said the current requirement of maintaining a minimum of 90 per cent of the prescribed CRR cash reserve ratio on a daily basis will continue.
  • RBI has allowed standalone primary dealers (SPDs) to participate directly in all overnight liquidity management operations.
  • The bank will review margin requirements under the Liquidity Adjustment Facility (LAF) on a periodic basis. However, the margin requirement for reverse repo transactions would continue to be 'Nil'.
  • RBI has announced some measures to improve communication on the Reserve Bank's liquidity management framework and procedures which are (a) the press release detailing Money Market Operations (MMO) would be modified suitably to show both the daily flow impact as well as the stock impact of the Reserve Bank's liquidity operations; (b) a quantitative assessment of durable liquidity conditions of the banking system on a fortnightly basis would be published with a lag of one fortnight; and (c) periodic consultations will be conducted with market participants and other stakeholders.

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