The panel will debate if the width should be fixed or flexible
The Reserve Bank of India (RBI) has formed a committee to review the current operating procedure of its monetary policy and the liquidity adjustment facility (LAF), in particular.
To be chaired by RBI executive director Deepak Mohanty, it will examine, among other things, if there is need for an LAF corridor and if so, whether the width should be fixed or flexible. And, ways to enable the corridor to function efficiently.
In its first-quarter review of annual policy in July, the central bank reduced the width of the LAF corridor by 25 bps to 125 bps, for the first time since November 2008, while announcing it would set up a group to review LAF operations.
“We have not determined what would be a comfortable corridor in an equilibrium situation. That is something the group will be looking at. In the future, a zero-width corridor is a distinct possibility,” RBI governor D Subbarao had said in the post-policy meeting with reporters.
LAF, introduced in June 2000, has emerged as the principal operating instrument for modulating short-term liquidity. Consequently, the repo and reverse repo rates have become key instruments for signalling a policy stance.
The Mohanty committee has also been given the mandate for assessing the role of the Bank Rate and to examine that of standing facilities such as export credit refinance. The panel will also survey the operating procedures of monetary policy of major central banks and suggest changes, if any, in the Indian context.
“India’s increasing integration with the global economy, large volatility in capital flows and sharp fluctuations in government cash balances have posed several challenges to liquidity management by the Reserve Bank, particularly in effectively signalling the monetary policy stance,” RBI said.
The panel will have members from the Indian Banks’ Association and the Fixed Income Money Market and Derivatives Association of India, apart from external experts. RBI has invited comments on the terms of reference from various stakeholders by September 20.
