RBI INTERNAL WORKING GROUP TO REVIEW THE LIQUIDITY MANAGEMENT FRAMEWORK

Sept. 28, 2019

An internal working group, formed by the RBI to review the current liquidity management framework with a view to simplifying it has submitted its report.

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.