RBI sets up Working Group on Operating Procedure of Monetary Policy : Seeks Comments on Terms of Reference

The Reserve Bank of India has constituted a Working Group to review the current operating procedure of monetary policy of the Reserve Bank, including the liquidity adjustment facility  (LAF).

The Working Group will be chaired by Shri Deepak Mohanty, Executive Director of the Reserve Bank and will be represented by the concerned departments of the Reserve Bank, Indian Banks’ Association (IBA) and Fixed Income Money Market and Derivatives Association of India (FIMMDA). The Group will also include external experts.

The proposed terms of reference of the Working Group are:

1. to survey the operating procedures of monetary policy of major central banks;
2. to review the current operating procedure of monetary policy in India, in particular, the Liquidity Adjustment Facility (LAF);
3. to examine the operation of the LAF with regard to:

1. the width of the corridor
2. the frequency and timing of auctions
4. to assess the role of the Bank Rate;
5. to examine the role of standing facilities, such as, the export credit refinance; and
6. to suggest changes to the current operating procedure of monetary policy in India in the light of international practices and domestic experience, with particular reference to:
1. whether there should be a corridor at all
2. if so, whether its width should be fixed or variable under specified conditions
3. if so, what instruments/mechanisms may be necessary to enable the corridor to function efficiently.

Comments and suggestions on the terms of reference may please be addressed to the Adviser-in-Charge, Monetary Policy Department, Reserve Bank of India, Central Office, Mumbai 400 001 or sent by email (mailto:cgmincmpd@rbi.org.in) by September 20, 2010 .

Background

In recent years, the operating procedure of monetary policy  has witnessed significant changes with the development of the money market and changes in liquidity conditions.  In the process, the Liquidity Adjustment Facility (LAF), introduced in June 2000, has emerged as the principal operating instrument for modulating short-term liquidity. Consequently, the repo and the reverse repo rates have become the key instruments for signalling the monetary policy stance. These instruments, along with others, such as, the cash reserve ratio (CRR), open market operations (OMO) and market stabilisation scheme (MSS), have served the Indian monetary and financial system well. However, 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.

Against this backdrop, there was a need to revisit the framework of the operating procedure of monetary policy  As announced in the first Quarter Review of Monetary Policy for 2010-11, therefore, the Reserve Bank has now constituted the working group to review the framework of the  operating procedure of monetary policy.

Alpana Killawala
Chief General Manager

Press Release : 2010-2011/375