The Reserve Bank of India (RBI) is set to meet with lenders on May 21 to discuss potential changes to its monetary policy operations. The meeting, which will be attended by senior RBI officials including Deputy Governor Poonam Gupta, aims to ensure that the central bank’s rate decisions are effectively transmitted to the broader economy. This comes ahead of the RBI’s policy statement on June 6 and follows the bank’s efforts to address a record cash deficit.
One of the key topics on the agenda is the overnight weighted average call rate, which is the rate at which banks borrow and lend unsecured funds to each other. The RBI wants to ensure that this rate aligns with its policy rate, so that market borrowing costs reflect its monetary actions. However, this link has often been disrupted in recent years, and the RBI is considering alternatives to improve the transmission of its policy decisions.
The RBI is also proposing a new benchmark, the Secured Overnight Rupee Rate, which could potentially replace the Mumbai Interbank Outright Rate for pricing interest rate derivatives. Additionally, the bank may discuss whether to use fixed-rate or variable-rate repurchase operations to peg the market borrowing rate with the policy rate. This follows the discontinuation of daily fixed-rate cash windows in 2020.
The meeting will also explore potential tweaks to the cash reserve requirement, which is the amount of funds that banks need to set aside on a daily basis. Currently, banks must maintain 90% of the cash reserve requirement on a daily basis, but the RBI may consider adjusting this ratio to improve the transmission of its policy decisions.
Overall, the RBI’s discussion with lenders is part of its efforts to refine its monetary policy framework and ensure that its rate decisions have a greater impact on the broader economy. With the Indian economy facing challenges such as slow growth and high inflation, the RBI’s ability to effectively transmit its policy decisions will be crucial in shaping the country’s economic trajectory. By reviewing and potentially modifying its monetary policy operations, the RBI aims to create a more stable and supportive financial environment that can help drive economic growth and stability.