Its other objectives include an overhaul of LAF and finding new ways of sterilising the liquidity generated by RBI intervention in the foreign exchange market, an objective spelt out in greater detail in a complementary report on instruments of sterilisation.
The bank rate, conceived originally as the monetary policy instrument to signal the interest rate stance of the central bank, has fallen into disuse as no other rate, except that for export refinance, is now linked to it.
As its efficacy as a signalling mechanism has declined, the money and debt markets take their cue from other measures that have a direct impact on liquidity and the cost of funds, such as the repo rate and the cash reserve ratio.
The central bank feels therefore that the signalling function of the bank rate can be better exercised by the repo rate. Yet the repo rate, as it currently works, is not without flaws.
In the present situation of excess liquidity, it has become the floor rate at which the RBI is forced to accept funds from cash-flush banks unable to find other avenues for investment.
