The Reserve Bank of India has released a report on liquidity management framework to manage system liquidity more effectively. The report was prepared by an internal working group.
The apex bank has asked for comments of stakeholder and members of the public on the report. The liquidity framework will be finalised after the recommendations of the group and the public feedback are taken into account. Last date for submission of feedback is October 31.
The internal working group has etched out some guidelines for effective liquidity management. "Some of the major guiding principles are: the liquidity framework should be guided by the objective of maintaining the call money rate close to the policy rate; it should be consistent with the policy rate; and it should not undermine the price discovery in the inter-bank money market," the report stated.
The key recommendations based on the principles are as follows:
1. The current liquidity management to largely continue in the present form - a corridor system with the call money rate as the target rate.
2. Framework should be flexible. If financial conditions warrant liquidity surplus, framework must be adaptable, said RBI.
3. Number of operations to be minimised. There should be one single overnight variable rate operation in a day, supported by fine-tuning operations if required, the report stated.
4. Current provision of assured liquidity of up to 1 per cent of NDTL (net demand and time liabilities) is no longer necessary since the proposed framework would meet the system's liquidity needs entirely.
5. Build-up of large deficit or surplus should be offset through appropriate durable liquidity operations. The group also recommended longer term repo operations at market related rates.
6. "The daily dissemination through Money Market Operations (MMO) press release should be improved by including the 'flow' impact of liquidity operations. To improve transparency, quantitative assessment of durable liquidity conditions of the banking system may also be published," RBI stated.