Reserve Bank gets freedom

Anoop Roy / Mumbai March 01, 2021

The Reserve Bank of India (RBI) ‘s recent currency and finance report has strongly demanded to allow the central bank to reverse reverse repo and marginal standing facility (MSF) rates. The report states that the Monetary Policy Committee (MPC) may decide on the repo rate.

The six-member MPC has three members from the Reserve Bank of India (RBI), including the governor.

The policy corridor is the difference between the repo rate at which the central bank lends to the banks and the reverse repo rate at which the Reserve Bank takes the money from the banks. Banks have got an emergency cash borrowing facility called Marginal Standing Facility (MSF), through which banks can borrow from the Reserve Bank by paying 25 basis points above the repo rate. On 17 April, when the Reserve Bank decided separately and cut the reverse repo, it faced criticism. These critics also included former Governor Urjit Patel who said that the decision reduced the power of the MPC.

The currency and finance report released on Friday states that the Reserve Bank must retain the freedom to change the reverse repo rate and MSF rate for liquidity management purposes. However, the central bank claims that it is not its official opinion on the report.

The report has argued that these rates are linked to repo and by deciding on the repo rate action, the MPC can effectively decide on these rates as well.

“The decision to change the reverse repo rate and the MSF rate and their announcements may go beyond the MPC’s opinion and be included in the Reserve Bank’s statement on development and regulatory policies,” the report said.

Further, for the purpose of meeting the expectations, the Reserve Bank should also clarify that on normal days it will operate within the same scope with the MSF rate and fixed reverse rate and has an unsymmetrical liquidity adjustment facility (LLF) at exceptional There is an option to operate along the corridor.

While the MPC must definitely fix the required repo rate to achieve the inflation target, the policy rate itself is part of the LLF range.

The operational process of monetary policy is guided by the objective of matching the repo rate to the operational goal of monetary policy – the WACR (weighted average call rate). This is accomplished through active liquidity management in line with monetary policy steps.

The report argues that day-to-day liquidity management functions are entirely within the Reserve Bank’s domain.

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