The Reserve Bank of India (RBI) may implement the recommendations of the working group on operating procedure of monetary policy on May 3, when it announces the annual monetary and credit policy for financial year 2011-12.
On March 15, the working group, chaired by RBI Executive Director Deepak Mohanty, had submitted its report, for which comments and suggestions were invited till end-March. RBI has, since then, held various discussions on the recommendations with market participants.
“The report may be accepted, as it contains slight modifications on operating procedures. Once accepted, it could be immediately implemented,” said the treasury head of a public sector bank.
Market participants expect the recommendations on a single policy rate, including oil bonds for reverse repo operations, second liquidity adjustment facility (LAF) and increasing the daily requirement of cash reserve ratio from the current 70 per cent to 80 per cent are likely to be implemented soon.
The recommendations may, however, have to be tweaked first. A few conditions are expected to be put before banks for them to avail of liquidity support under the bank rate. “RBI may ask banks to disclose the end use of the funds availed of the under bank rate, as it would be an exceptional facility,” said a bond dealer with a primary dealership firm.
The working group suggested the bank rate be reintroduced as a discount rate — the rate at which RBI would provide liquidity under a new collateralised exceptional standing facility. This could be up to one per cent of net demand and time liabilities of banks, which would be carved out of the required statutory liquidity ratio portfolio. The bank rate would be 50 basis points higher than the policy rate and serve as the upper limit of the proposed LAF corridor.
Economists at Goldman Sachs said, “The liquidity adjustment facility operations are very passive, with RBI providing as much liquidity as banks ask for. Instead, we think repo operations by RBI should be active, like foreign exchange operations. The system would then would work with minimum liquidity, and this would incentivise banks to operate in the term money market and help develop it and improve the cash management of banks. There will be no assurance that RBI would take or give whatever the banks want.”
Implementation of other recommendations like auctioning of government cash balances may take longer, since they would require the government’s consent. “There is no clarity on how the auctions would be carried out,” said a banking analyst with a domestic brokerage.
The second LAF window, which RBI has temporarily provided, may be adopted permanently, since banks now rely heavily on it. There are more operations under the second LAF window than those under the first.
