The Reserve Bank of India in its notification dated 28 September, 2019 released a report on liquidity management framework submitted by an internal working group that was set up to help the central bank manage system liquidity more effectively.
The internal working group has articulated some guidelines for effective liquidity management. 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 key recommendations based on the principles are as follows:
- The current liquidity management framework should largely continue in its present form– a corridor system with the call money rate as the target rate.
- The framework should be flexible. If financial conditions warrant a situation of liquidity surplus, the framework should be adaptable.
- Minimizing the number of operations should be an efficiency goal of the liquidity framework.
- There should be ideally one single overnight variable rate operation in a day, supported by fine-tuning operations, if required.
- The current provision of assured liquidity – up to 1% of NDTL – is no longer necessary since the proposed liquidity framework would entirely meet the system’s liquidity needs.
- Build-up of a large deficit or surplus, if expected to persist, should be offset through appropriate durable liquidity operations.
- In addition to OMOs and forex swaps, longer term repo operations at market related rates.
- 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.
The liquidity framework shall be finalized taking into account the recommendations of the Group. The RBI has invited public feedback, suggestions and comments on the report by October 31, 2019 through email.
Click here to read the notification.