By Gopika Gopakumar
(Reuters) -India’s central bank has retained the overnight weighted average call rate as the operating target of monetary policy under a revised liquidity management framework, it said on Tuesday, a day before its monetary policy decision.
In August, the Reserve Bank of India asked an internal working group to look at revising the framework, which seeks to align market rates with the key interest rate for ensuring effective transmission of monetary policy. Liquidity in the banking system determines market interest rates, which in turn, influence credit growth and economic activity.
“The Reserve Bank will endeavour to align the WACR (weighted average call rate) to the policy repo rate by ensuring optimum level of system liquidity using the instruments defined under this framework,” it said in a press release.
The RBI also retained the policy corridor, with the policy repo rate in the middle, the standing deposit facility as the floor and the marginal standing facility as the ceiling.
The central bank will discontinue the 14-day variable rate repos and variable rate reverse repos as the main tools for managing short-term liquidity and will use 7-day liquidity operations as its primary tool while also relying on repos and reverse repos ranging from overnight to 14 days.
All instruments under the existing liquidity framework, including open market operations, long-term variable rate repos/reverse repos and forex swap auctions will continue to be part of the revised liquidity management framework.
The RBI assured the market it will provide advance notice of at least one day to reduce uncertainty around the tenor, quantum and timing of liquidity operations.
The central bank has retained the requirement that banks maintain a minimum of 90% of the cash reserve ratio needs on a daily basis.
(Reporting by Nishit Navin in Bengaluru and Gopika Gopukumar in Mumbai; Editing by Mrigank Dhaniwala)
