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India Equity Research Reports, IPO and Stock News
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Economy
Monetary Policy
Report of Working Committee on Operating Procedure of Monetary Policy. The
working committee headed by RBI Executive Director, Dr. Deepak Mohanty, has clearly
highlighted the need to keep liquidity in a deficit mode as part of its monetary policy
framework. In the report, the group recommends that the repo rate should be the
operative rate as it is unconventional by international best practices to have two policy
rates. The optimal corridor has been recommended as a 150 bps spread between the
reverse repo rate and the resurrected Bank Rate. Liquidity management including its
calculations is to be strengthened and made more transparent.
Transition to single operative policy rate with an optimal interest rate corridor
` The group opines that the repo rate should be the single policy rate to signal RBI’s monetary
policy stance. It is unconventional as per international best practices to have two policy rates.
` The Bank Rate is to be reactivated as a discount rate at which the RBI will inject liquidity
under collateralized Exceptional Standing Facility up to 1% of NDTL carved out of their SLR
holdings. This facility is not entirely new and the recommendation was to convert this into a
standing facility. This will form the upper end of the interest rate corridor.
` The reverse repo should be the lower bound of the interest rate corridor. The width of the
corridor is envisaged at 150 bps. The aim of the width is to ensure the development of the
short-term money market along with reduction of volatility in short-term rates. To prevent
banks being incentivized to put surplus funds with the RBI in the LAF, the group
recommended an asymmetric structure to the corridor around the repo rate. The Bank Rate
will be 50 bps higher than the repo rate while the gap between the reverse repo rate (lower
end of the corridor) and the repo rate will be 2X, i.e. 100 bps.
` Under the new system, the weighted average overnight call money rate will be the operating
target of the RBI, as the monetary transmission is the fastest in this segment.
` The other important highlight of the report is to seek a closer co-ordination between the RBI
and the fiscal authority. To this extent the group recommends that a scheme for auctioning
of Government surplus cash balances be put in place.
Liquidity envisaged to be maintained in the negative zone to ensure smoother policy transmission
The objective of the working committee in terms of liquidity management is to keep it in the
deficit mode for effective policy transmission and variation of the deficit should be contained
within (+/-)1% of NDTL of banks. Liquidity management in case of any excess of this variation
should be done through OMO, CRR and MSS. Along with these the group recommends regular
conduct of the second LAF which was used extensively when liquidity situation became extremely
tight. To improve the effectiveness of OMOs the group recommended incentivizing banks to markto-market their SLR portfolio. To consolidate the position of the banks, the group advises that
minimum level of reserves to be kept daily with the RBI should be raised to 80% of the required
CRR from current levels of 70%. The group also advises that methodology for internal forecasts of
liquidity should be further strengthened and information of government cash balances should be
put out in public domain with minimum time lag for better assessment by market players.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Monetary Policy
Report of Working Committee on Operating Procedure of Monetary Policy. The
working committee headed by RBI Executive Director, Dr. Deepak Mohanty, has clearly
highlighted the need to keep liquidity in a deficit mode as part of its monetary policy
framework. In the report, the group recommends that the repo rate should be the
operative rate as it is unconventional by international best practices to have two policy
rates. The optimal corridor has been recommended as a 150 bps spread between the
reverse repo rate and the resurrected Bank Rate. Liquidity management including its
calculations is to be strengthened and made more transparent.
Transition to single operative policy rate with an optimal interest rate corridor
` The group opines that the repo rate should be the single policy rate to signal RBI’s monetary
policy stance. It is unconventional as per international best practices to have two policy rates.
` The Bank Rate is to be reactivated as a discount rate at which the RBI will inject liquidity
under collateralized Exceptional Standing Facility up to 1% of NDTL carved out of their SLR
holdings. This facility is not entirely new and the recommendation was to convert this into a
standing facility. This will form the upper end of the interest rate corridor.
` The reverse repo should be the lower bound of the interest rate corridor. The width of the
corridor is envisaged at 150 bps. The aim of the width is to ensure the development of the
short-term money market along with reduction of volatility in short-term rates. To prevent
banks being incentivized to put surplus funds with the RBI in the LAF, the group
recommended an asymmetric structure to the corridor around the repo rate. The Bank Rate
will be 50 bps higher than the repo rate while the gap between the reverse repo rate (lower
end of the corridor) and the repo rate will be 2X, i.e. 100 bps.
` Under the new system, the weighted average overnight call money rate will be the operating
target of the RBI, as the monetary transmission is the fastest in this segment.
` The other important highlight of the report is to seek a closer co-ordination between the RBI
and the fiscal authority. To this extent the group recommends that a scheme for auctioning
of Government surplus cash balances be put in place.
Liquidity envisaged to be maintained in the negative zone to ensure smoother policy transmission
The objective of the working committee in terms of liquidity management is to keep it in the
deficit mode for effective policy transmission and variation of the deficit should be contained
within (+/-)1% of NDTL of banks. Liquidity management in case of any excess of this variation
should be done through OMO, CRR and MSS. Along with these the group recommends regular
conduct of the second LAF which was used extensively when liquidity situation became extremely
tight. To improve the effectiveness of OMOs the group recommended incentivizing banks to markto-market their SLR portfolio. To consolidate the position of the banks, the group advises that
minimum level of reserves to be kept daily with the RBI should be raised to 80% of the required
CRR from current levels of 70%. The group also advises that methodology for internal forecasts of
liquidity should be further strengthened and information of government cash balances should be
put out in public domain with minimum time lag for better assessment by market players.
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