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Informist, Wednesday, Aug. 6, 2025

 

--RBI releases internal working group report on liquidity mgmt framework 
--RBI seeks comments on liquidity mgmt framework report by Aug 29 
--RBI report: Recommend keeping overnight WACR as operating policy target 
--RBI report: Moot continuing existing LAF corridor with repo rate in middle 
--RBI report: Moot discontinuing 14-day VRR, VRRR auctions as main operation 
--RBI report: Moot transient liquidity mgmt via 7-day repo, reverse repo ops 
--RBI report: Moot other overnight-14 days liquidity ops on RBI discretion 
--RBI report: OMOs, long-term VRR, VRRRs, FX swaps enough to manage liquidity 
--RBI report: Working group felt standlaone PDs may not be given MSF access 
--RBI report: Recommend RBI retain daily minimum requirement of 90% of CRR 
--RBI report: Found WACR effective in transmitting signals to T-bills, gilts 
--RBI report: Found WACR effective in transmitting signals to CPs, CDs 
--RBI report: RBI may keep track of overnight segments other than WACR 
--RBI report: RBI liquidity mgmt ops may consider movement in secured rates 

 

MUMBAI – An internal working group of the Reserve Bank of India has recommended keeping the overnight weighted average call rate as the operating target for its liquidity operations. The central bank released the report of the working group to review the Liquidity Management Framework Wednesday and has invited suggestions by Aug. 29. 

 

The report said the weighted average call rate has a direct influence on the short-term interest rates. Banks and standalone primary dealers, which are the participants in the call money market, have access to the RBI's Liquidity Adjustment Facility and also fall under the central bank's regulatory ambit. Thus, the RBI will have greater influence over the rate, the report said. 

 

"It is equally pertinent to note that while the collateralised market segment accounts for significant portion of the total overnight money market volume, it features a notable presence of non-bank entities such as mutual funds, insurance companies and pension funds, whose transactions in the overnight money market segments do not reflect the dynamics of inter-bank market for reserves and these entities are not regulated by the Reserve Bank," the RBI report said.

 

The weighted average call rate is also seen as an effective way to transmit signals to other market rates such as treasury bills, commercial papers, certificates of deposit and government securities, the report said. Hence, despite lower trading volumes, the call money market remains crucial to facilitate effective monetary policy transmission. As the central bank keeps the weighted average call rate as the operating target, it will also continue to monitor other overnight market segments to ensure an orderly evolution of money market rates.  

 

The working group has also recommended continuing with the existing symmetric Liquidity Adjustment Facility corridor. The Standing Deposit Facility rate and the Marginal Standing Facility rates will therefore continue to be 25 basis points away from the repo rate. As per the recommendations, the Marginal Standing Facility rate will stay as the ceiling and the Standing Deposit Facility rate as the floor of the corridor. 

 

Taking into consideration that banks tend to refrain from parking funds with the central bank under the 14-day variable rate reverse repo auctions, the working group has suggested discontinuing the current 14-day main liquidity management operation. Instead, the report recommended that the central bank manage the transient systemic liquidity through seven-day operations. Moreover, to mitigate market uncertainties, the working group recommended that market participants be informed about any variable rate repo or variable rate reverse repo auctions at least one day in advance.  

 

"The repo or reverse repo operations of tenor overnight to 14 days are expected to handle the changes in system liquidity due to frictional factors," the report added. 

 

The working group also said the current set of instruments under the liquidity management facility, such as open market operations, long-term variable rate repo and variable rate reverse repo operations and foreign exchange swap auctions, is sufficient for managing durable liquidity in the banking system. Consequently, no changes were suggested on that front.

 

The daily minimum requirement of 90?sh Reserve Ratio maintenance by banks is also suggested to be retained by the RBI. Lowering the daily Cash Reserve Ratio maintenance requirement may induce higher volatility in money market rates, especially at the end of the fortnight, which may not be desirable, the report said. "It has also been observed that banks rarely maintain daily reserve balances below 95% of the prescribed CRR (Cash Reserve Ratio)"

 

The report further recommended that standalone primary dealers should not be given access to the Marginal Standing Facility. The working group reasoned that the standalone primary dealers, unlike banks, do not have reserve requirements and they do not face any unforeseen payment obligations beyond market hours.   

 

Earlier in the day, RBI Governor Sanjay Malhotra said that since the current Liquidity Management Framework has been operative since February 2020, a change was imminent.  End

 

Reported by Vidhushi RajPurohit

Edited by Saji George Titus

 

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