An internal working group (IWG) of the Reserve Bank of India (RBI) has suggested introduction of longer-term repo operations at market-related rates of up to one-year tenor as an alternative to open market operations conducted by the central government to manage liquidity in the banking system. The RBI had constituted the working group to review the current liquidity management framework with a view to simplify it and suggest measures to clearly communicate the objectives and the toolkit for liquidity management.
The panel has recommended that 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. While the corridor system would normally require the system liquidity to be in a small deficit, if financial conditions warrant a situation of liquidity surplus, the framework should be adaptable. It also said minimizing the number of operations should be an efficiency goal of the liquidity framework. Consequently, there should be ideally one single overnight variable rate operation in a day, supported by fine-tuning operations, if required.
On managing durable liquidity, the working group has recommended that, as an alternative to OMO purchases, longer-term variable rate repos, of more than 14 days and up to one-year tenor, be considered as a new tool for injection if system liquidity is in a large deficit. Similarly, longer-term variable-rate reverse-repos could be used to absorb excess liquidity. As these are possible substitutes for OMOs, these instruments should be operated at market determined rates. Further, it has suggested that the current difference of 25 basis points between the repo rate and the reverse-repo rate, as well as between the repo rate and the marginal standing facility (MSF) rate, be retained.