The Reserve Bank of India (RBI) has shifted towards a single policy rate regime. The reverse repo rate and the additional liquidity support rate have now been linked to the repo rate.
RBI, while announcing the annual monetary policy for 2011-12, said the operating target of the policy would be the weighted average overnight call money rate. “The overnight call money rate is an important indicator of the liquidity in the system. With this, RBI would have better control over liquidity and interest rates,” said a treasury official of a public sector bank.
The reverse repo rate has been fixed at 100 basis points (bps) below the repo rate and the rate at which additional liquidity support can be availed of by banks would be 100 bps above the repo rate. Hence, the corridor has been fixed at 200 bps, which is higher than the 150-bps corridor suggested by the working group.
Banks will be able to avail of extra liquidity from RBI under the marginal standing facility up to one per cent of net demand and time liability at 8.25 per cent. “This is an exceptional facility that a bank will access only after it has played it out in the market repo and collaterised borrowing and lending obligations,” said RBI Governor, D Subbarao.
The bank rate, however, remains irrelevant. “We had some legal and operational problems to link the bank rate to the policy rate. Some of the other interest rates in the economy are actually linked to the bank rate. We need to take stock of the implications of linking the base rate to the policy rate. One option for us was to wait and solve all the issues before we changed the operating procedure, but we thought this was needed now and we de-linked the bank rate,” said Subbarao. He added the bank rate would remain the same for now.
The working group had recommended that the bank rate be revived so that banks could avail of extra liquidity.
More From This Section
Other recommendations like increasing the daily cash reserve ratio requirement to 80 per cent and auctioning of government cash balances were not implemented.
“We should now gear up for high interest rates and liquidity in deficit mode,” said Moses Hardings, head (global markets group), IndusInd Bank.