The Reserve Bank has constituted a working group to review the current operating procedure of monetary policy, as transmission of the policy to the rest of the system remains imperfect. The group, to be headed by RBI executive director Deepak Mohanty, will also review the liquidity adjustment facility (LAF), through which the central bank manages money supply in the system on a day-to-day basis.
“The RBI has constituted a working group to review the current operating procedure of monetary policy in India, including LAF,” the central bank said in a statement in Mumbai on Monday.
Besides, the working group has been asked to survey the operating procedures of major central banks.
The nine-member group will also assess whether there should be a corridor at all.
The RBI conducts LAF through short-term lending (repo) rate and borrowing (reverse repo) rate. The difference between them is called corridor.
After India started emerging out from the effect of global financial crisis, RBI has narrowed down this corridor to one per cent.
The group will also assess the role of Bank Rate, at which banks borrow from RBI, which has not been used as a monetary tool by the apex bank for several years.
In its quarterly review in July, RBI had said, “In the context of the changing liquidity dynamics, the operation of the LAF needs to be studied. Accordingly, it is proposed to set up a Working Group to review the current operating procedure of monetary policy of the Reserve Bank, including the LAF.”
In the past, RBI had raised concerns regarding the transmission of RBI’s monetary policy to the system, as banks sometimes do not respond to the central bank’s signals in a timely manner.
In recent times, RBI has been tightening its monetary policy to combat inflation, which stood at 8.51 percent in August.