A Reserve Bank of India (RBI) working group today suggested that the short-term lending rate (repo) be made the single policy rate to signal the monetary policy stance, to effectively deal with inflation without hurting growth.
At present, there are three rates -- repo, reverse repo and bank rate -- through which RBI injects or absorbs liquidity from the system.
The proposal is aimed at aligning the Indian monetary system with international best practices. The RBI has invited comments from the stakeholders till March-end on the proposal.
"The repo rate should be the single policy rate to unambiguously signal the stance of monetary policy to achieve macroeconomic objectives of growth with price stability," the RBI working group said.
Under the proposed system, reverse repo and bank rate would adjust automatically with change in the repo rate, which would be announced by the RBI with a view to tame inflation and promote growth.
All the rates will operate within a corridor of 150 basis points, said the working group which was headed by RBI Executive Director Deepak Mohanty.
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While the bank rate would be 50 basis points above the single policy rate (repo rate), reverse repo rate would be 100 basis points below it, the report said.
The panel further said that bank rate, which has remained dormant since April 2003, should be re-activitated as a monetary management instrument.
"The bank rate be activated as a discount rate with a spread over the repo rate. Once the policy rate changes, the bank rate should change automatically with a fixed spread over the repo rate," it added.
Bank rate is the rate at which banks can borrow long-term funds from the RBI to overcome liquidity shortage. Banks, however, have been borrowing mainly from repo window, which is a short-term instrument.
Currently, the repo rate is 6.5%, reverse repo (short-term borrowing) rate 5.5% and bank rate 6%. Although the RBI has raised key policy rates seven times since March 2010 to tame inflation, it has kept the bank rate unchanged since April 2003.