RBI INTERNAL WORKING GROUP TO REVIEW THE LIQUIDITY MANAGEMENT FRAMEWORK

Recommendations made: 

• Guiding principles for an effective liquidity management framework should be: the liquidity framework should be guided by the objective of maintaining the call money rate close to the policy rate; it should be consistent with the policy rate; and it should not undermine the price discovery in the inter-bank money market.
  
  
• The current liquidity management framework should largely continue in its present form- a corridor system with the call money rate as the target rate.
  
  
• The framework should be flexible. While the corridor system would normally require the system liquidity to be in a small deficit, if financial conditions warrant a situation of liquidity surplus, the framework should be adaptable.
  
  
• Minimizing the number of operations should be an efficiency goal of the liquidity framework. Consequently, there should be ideally one single overnight variable rate operation in a day.
  
  
• The current provision of assured liquidity – up to 1% of NDTL - is no longer necessary since the proposed liquidity framework would entirely meet the system’s liquidity needs.
  
  
• Build-up of a large deficit or surplus should be offset through appropriate durable liquidity operations.