Monetary Policy Framework of RBI : As Assessed by Bank of International Sattlement

RBI

DEC-2021

Reserve Bank of India

Institutional framework

The Reserve Bank of India Act, 1934, provides the legislative mandate to the Reserve Bank of India (RBI) to operate a modern monetary policy framework and, therefore, the RBI has adopted flexible inflation targeting (FIT) as the framework for monetary policy. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. The Government of India, in consultation with RBI, sets the inflation target in terms of the Consumer Price Index (CPI) every five years (current target applicable from April 2021 to March 2026).

To achieve the objectives of monetary policy, the RBI uses an interest rate framework with the overnight call money market rate, measured by the weighted average call money rate (WACR), as the operating target. A Monetary Policy Committee (MPC), with the Governor of the RBI as its chairperson, determines the policy rate, i.e., the repo rate, required to achieve the mandated inflation target. The RBI endeavours to anchor the operating target, i.e., WACR, to the policy repo rate through the instruments available under monetary policy implementation framework.

A semi-annual Monetary Policy Report (MPR) is issued by the RBI, elucidating the macroeconomic framework, analysis of developments along with forecasts of inflation and output, liquidity conditions and financial market developments along with global environment and outlook.

Key features of the monetary policy implementation framework

The monetary policy framework aims at setting the policy repo rate at an appropriate level to achieve the monetary policy objectives based on an assessment of the current and evolving macroeconomic situation. Liquidity management is the operating procedure of monetary policy which envisages modulation of liquidity conditions, aimed at anchoring the WACR to the policy repo rate. Within its implementation framework, the RBI undertakes repurchase operations under Liquidity Adjustment Facility (LAF) and Open Market Operations involving outright sale and purchase of eligible securities, offers standing facilities and requires banks to hold minimum reserves in their current accounts with it. The current minimum reserve requirement has been set at 4 per cent of the net demand and time liabilities (NDTL) of banks and the reserves are held in the form of Cash Reserve Ratio (CRR) by banks in their current account with the RBI. These reserves are not remunerated. RBI allows limited averaging of reserves within the maintenance period, i.e., a fortnight, to allow banks to absorb liquidity shocks at their discretion and to help in stabilising short-term interest rates in the money markets.

Reverse-repo is a standing facility for deposit of funds by the eligible entities with the RBI. In addition, the RBI has provided standing lending facility viz., Marginal Standing Facility (MSF), which eligible entities can access to meet their overnight reserve requirements arising out of unforeseen frictional factors. The liquidity management corridor has the MSF rate as its upper bound (ceiling), currently 25 bps above the repo-rate and the fixed rate reverse repo rate as the lower bound (floor), which is 65 bps below the repo rate with the policy repo rate, which is set by MPC, in between. Thus, the MSF together with the fixed rate reverse repo rate constitute the corridor for overnight money market rates. To further strengthen the operating framework, an uncollateralised Standing Deposit Facility (SDF) has been notified but this is yet to be operationalised.

The Reserve Bank introduced the revised liquidity management framework in February 2020. As part of this framework, the RBI conducts a 14-day variable-rate term repo/ reverse repo as the main liquidity operation to coincide with the CRR maintenance cycle for managing frictional liquidity requirements. The main liquidity operation is supported by fine-tuning operations, overnight and/or of longer duration, to tide over any unanticipated liquidity changes during the reserve maintenance period. In addition, the Reserve Bank can conduct, if needed, longer-term variable rate repo/reverse repo operations of more than 14 days. Outright Open Market Operations (OMOs) and long-term FX swap auctions are conducted for supplying/withdrawing liquidity for longer duration to steer liquidity conditions consistent with the monetary policy objective. All the liquidity management operations of the RBI are collateralised by eligible collateral notified by the RBI from time to time.

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Monetary Policy Committee
Major mandates 1 “the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth” as stated in the Preamble to the amended Reserve Bank of India Act, 1934
Decision-making process Majority voting
Frequency / length of meetings Bi-monthly
Frequency of announcements Bi-monthly
Main policy target CPI inflation target of 4 per cent with a band of +/– 2 per cent; policy repo rate

Overview of key features

Key policy rate Repo rate
maturity (days) 1 (overnight)
Operating target Weighted average call money rate
maturity (days) 1 (overnight)
Standing facilities Lending/Deposit
Corridor width (bp) (+)25/(-)65 2
Reserve requirements Yes
maintenance period 2 weeks
Main operation 3 14-day variable rate term-repo / reverse repo
functions Managing fricitonal liquidity requirements
maturity (days) Managing fricitonal liquidity requirements
regular interval Managing fricitonal liquidity requirements
frequency Managing fricitonal liquidity requirements
Overall frequency  
Discretion left to operational desk Some discretion with respect to the choice of instrument, size, tenor and timing of operations in case of fine tuning operations
Key policy signals via  
announcement
keynote tender
standing facility
other

Monetary policy communication

Explicit use of forward guidance Yes
Timing / media of policy announcement Press Release issued on RBI website at 10:30am IST on the pre-decided monetary policy announcement day
Policy announcement and documents Policy repo rate, assessment of growth and inflation, liquidity and financial market conditions
Explaining policy decisions Detailed press release / media conferences and teleconference with researchers/ analysts
Dissemination of minutes (timing / media) Yes. On the fourteenth day after the release of the MPC resolution statement.
Content of minutes Description of economic and financial conditions, growth and inflation projections, underlying rationale for the policy decision. It also contains the vote of each member of the MPC and the statement explaining the rationale for his/her vote.
Publication of forecasts 4 Forecasts of inflation and growth are included in the MPC resolutions and the half-yearly monetary policy reports (April & October).
Publication of projected path of policy rate 5 No

Reserve requirements: ratios and size

Main functions served Monetary control, prudential regulation, Liquidity management
Domestic currency 4% 6
Foreign currency 4%
Average 4%
Required reserves INR 6,190.74 bn
Required reserve as % of GDP 3.14% 7
Actual reserves INR 4354.77 bn
Actual reserve as % of GDP 3.16% 8

Main features of reserve requirements

Averaging Yes
Carry-over No
Type Lagged
Maintenance period 2 weeks
end (day) Reporting Friday of every fortnight
Calculation period 2 weeks
end (day) Reporting Friday
Lag before maintenance 2 weeks
Vault cash N
restrictions  
Remuneration N
average rate  
marginal rate  
Framework last changed 04/16

Liquidity position and forecasting

Structural Position Surplus 9
Most volatile factor(s) Capital flows, Government sector flows
Most unpredictable factor(s) Capital flows, Government sector flows
Forecast horizon(s) 4 weeks
Frequency Weekly
Frequency of revision Weekly
Forecast published? No

Standing facilities: lending / market ceiling

Name Marginal Standing Facility (MSF)
Form Collateralised against government securities
Pricing method MSF Rate (25 bps above the policy Repo Rate)
Maturity Overnight
Access limited by/to (i) Collateral; Scheduled commercial banks
(SCBs), select Urban Cooperative Banks (UCBs), Regional Rural Banks (RRBs) and select Scheduled State Cooperative banks (SSCBs).
Function(s) Liquidity management

Standing facilities: deposit / market floor

Name (i) Reverse Repo;
(ii) Standing deposit facility
Form (i) Collateralised
(ii) Un-Collateralised
Pricing method (i) Repo rate 65 bps
(ii) Yet to be operationalised
Maturity (i) O//N
(ii) Yet to be operationalised
Access limited by/to (i) Eligible collateral; Scheduled commercial banks (SCBs), select Urban Cooperative Banks (UCBs), Regional Rural Banks (RRBs) and primary dealers, select Scheduled State Cooperative banks (SSCBs).
(ii) Yet to be operationalized
Function(s) (i) Liquidity management
(ii) Yet to be operationalised

Open market operations: repo or reverse repo

Name/Type 10 (i) 14-day Repo or Reverse Repo;
(ii) Fine-tuning Repo or Reverse Repo
Maturity (i) 14-day
(ii) Varies
Frequency (i) Fortnghtly (usually last day of the fortnight)
(ii) As needed
Pricing method (i) Auction
(ii) Auction
Access limited by/to (i) Scheduled commercial banks
(SCBs), select Urban Cooperative Banks (UCBs), Regional Rural Banks (RRBs) and select Scheduled State Cooperative banks (SSCBs).
(ii) SCBs, select UCBs, select RRBs, select SSCBs and primary dealers*
Function(s) (i) Liquidity management
(ii) Liquidity management

Open market operations: central bank bills

Name N/A
Total issuance  
Maturity  
Restrictions on possible maturities  
Pricing method  
Access limited by/to  
Discretion left to operational desk  

Open market operations: FX swaps

Maturity Discretionary
Frequency Discretionary
Pricing method Auction
Access limited by/to Authorised dealer category-1 banks
Function(s) Liquidity management

Other significant liquidity management means

Name/Type 11 (i) Open market Operation (OMOs)
(ii) Special OMOs- also referred as Ots
Form (i) Outright purchase or sales of central and state government securities
(ii) Simultaneous purchase and sale of government securities
Frequency (i) As and when needed, at the discretion of the Reserve Bank
(ii) As and when needed, at the discretion of the Reserve Bank
Maturity (i) Varies from auction to auction
(ii) Varies from aution to auction
Pricing Method (i) Multiple price auction
(ii) Multiple price auction
Access limited by/to (i) No restriction. Entities having securities account and funds account with the RBI can participate.
(ii) No restriction. Entities having securities account and funds account with the RBI can participate.
Function(s) (i) Durable liquidity management
(ii) Liquidity management

Settlement systems and intra-day liquidity facilities

Settlement system (i) RTGS
(ii) NEFT
Intra-day liquidity facility (i) Intra-day liquidity facility
(ii) Liquidity Support Facility
Charge (i) No charge
(ii) No charge
Foreign currency settlement system (i) Yes; netting through a central counterparty with Settlement on delivery versus payment (DvP basis)
(ii) Yes; netting through a central counterparty with Settlement on delivery versus payment (DvP basis)
CLS participation by banks (i) No. CLS services to Indian banks provided by Clearing Corporation of India Ltd (CCIL) as third party
(ii) No. CLS services to Indian banks provided by Clearing Corporation of India Ltd (CCIL) as third party 12
Other settlement system(s) (i) Government Securities settlement through central counterparty (CCIL)
(ii) Government Securities settlement through central counterparty (CCIL)

Collateral

Standing facilities: List of eligible collateral Government securities including State Government securities
Standing facilities: Discretion of central bank on collateral 13 Yes 14
Open market operations: List of eligible collateral Liquidity Adjustment Facility: Central and State Government securities
Open market operations: Discretion of central bank on collateral 15 Yes 16

Dissemination of operational information: liquidity forecast

Forecast published? No
Channel(s)  
Timing  
Remarks  

Dissemination of operational information: open market operations

Volume and price published? Yes
Channel(s) Press release on RBI website
Timing (i) Information on all Liquidity Adjustment Facility operations published on RBI website at 9 AM on the next working day
(ii) Press release on the same day after the operation for 14 day variable rate auctions, variable rate fine-tuning operations (FTOs), special open market operations and outright purchase/sale auctions

Dissemination of operational information: standing facilities

Lending facility usage: Channel(s) Press release on RBI website
Lending facility usage: Timing Next working day, at 9 am
Deposit facility usage: Channel(s) Press release on RBI website
Deposit facility usage: Timing Press release on RBI website

Other information dissemination

Type (i) Cash balances of scheduled commercial banks with RBI; volume and average rate in call / Triparty Repo / market repo / notice / term segments of the money market (one-day lag)
(ii) Government of India surplus cash balance reckoned for auction
(iii) Level and Variation in FX Reserves (one-week lag)
(iv) FX Intervention during a month (about one-month lag)
(v) Net durable liquidity that includes Govt. balances (one fortnight lag)
Channel(s) (i) Press release
(ii) Press release
(iii) Weekly Statistical Supplement (WSS) to the RBI Bulletin
(iv) RBI Bulletin
(v) Press release
Timing (i) 9.00 AM, Daily
(ii) 9.00 AM, Daily
(iii) Weekly
(iv) Monthly
(v) 9.00 AM, Daily

1 Describe as well the legal status of the mandate and involvement of government

2 Policy corridor around the repo rate made asymmetric in March 2020 and further widened in April 2020.

3 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).

4 For instance, economic and inflation forecasts related to policy decision.

5 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.

6 With effect from May 22, 2021.

7 Nominal GDP figure as on 31 March 2021 and reserves figures as of 30 June 2021.

8 Nominal GDP figure as on 31 March 2021 and reserves figures as of 30 June 2021.

9 Stance was changed by the MPC from Neutral to Accomodative in June 2019 policy.

10 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).

11 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.

12 CCIL started the settlement of cross currency deals of banks in India through the CLS Bank in April 2005. Through this arrangement, CCIL aggregates trades reported by all Member banks and enables banks to collectively enjoy the benefits of cross currency settlement through CLS Bank. This is a unique experiment whereby cross border settlement of an entire country is being achieved through a third party arrangement. Settlement through the CLS mechanism is on a payment versus payment basis.

13 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.

14 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes

15 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.

16 RBI has the discretion but it has so far not diluted the collateral.


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