India

India[₹]

Institutional framework

The RBI Act, 1934 provides the legislative mandate to the Reserve Bank of India (RBI) to operate a modern monetary policy framework and it has adopted flexible inflation targeting (FIT) as the framework of 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, has set the inflation target in terms of the Consumer Price Index (CPI), for five years (from August 2016 to March 2021).

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, ie, the repo rate required to achieve the mandated inflation target. The RBI endeavours to anchor the operating target, ie, WACR, to the policy repo rate through the instruments available under monetary policy implementation framework.

A bi-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. Once the repo rate is announced, the operating framework envisages modulation of liquidity conditions on a day-to-day basis, aimed at anchoring the WACR to the policy repo rate. Within its implementation framework, the RBI undertakes Open Market Operations in both forms, ie, repurchase operations under Liquidity Adjustment Facility (LAF) as well as 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, ie, 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.

All the liquidity management operations of the RBI are collateralised by the eligible collateral notified by the RBI from time to time. Under the LAF, the Reserve Bank conducts daily fixed rate overnight repo and reverse-repo operation. The interest rate for the daily overnight fixed-rate repo operation is the policy rate set by the MPC. The interest rate on the daily overnight fixed-rate reverse-repo operation sets the lower-end of the policy corridor (currently 25 bps below the repo-rate). 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 interest rate on the MSF sets the upper-end of the corridor (currently 25 bps above the repo-rate). 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, a Standing Deposit Facility (SDF) has been notified but this is yet to be operationalised. The RBI also conducts 14-day variable-rate repo operations twice a week to supply reserves covering the whole reserve maintenance period. Apart from the daily fixed-rate operations and the twice-weekly 14-day variable rate repo auction, the RBI conducts variable-rate repo and reverse-repo auctions of varying tenors, as and when needed, to steer liquidity conditions consistent with the monetary policy objective. Outright Open Market Operations (OMOs) and long-term FX swap auctions are conducted for supplying/withdrawing liquidity for longer duration.

The operating framework is fine-tuned and revised as and when required to achieve the monetary policy objectives.

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Monetary Policy Committee
Major mandates Maintain price stability while keeping in mind the objective of growth
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 overnight call money rate
maturity (days) 1 (overnight)
Standing facilities Lending
Corridor width (bp) +/– 25
Reserve requirements Yes
maintenance period 2 weeks
Main operation (i) Fixed rate repo / reverse repo under LAF
(ii) Variable rate term-repo
(iii) Variable rate fine-tuning operations (FTO)
functions
maturity (days)
regular interval
frequency
Overall frequency ≥ 1 x d
Discretion left to operational desk Some discretion with respect to choice of instrument, size, tenor and timing of operations with relation to FTOs
Key policy signals via
announcement
keynote tender
standing facility
other

Monetary policy communication

Explicit use of forward guidance
Timing / media of policy announcement Yes. 11.45 am IST on last day of Monetary Policy Committee (MPC) Meeting when the Governor’s resolution is put to vote; central bank website.
Policy announcement and documents Policy repo rate
Explaining policy decisions Detailed press release / media conferences and teleconference with researchers/analysts
Dissemination of minutes (timing / media) Yes. On the fourteenth day after every meeting of the MPC.
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 In forecasts of inflation and growth for the period between six to eighteen months from the date of publication of the Monetary Policy Report, ie, in every MPC resolution released twice in a year (April and October).
Publication of projected path of policy rate No

Reserve requirements: ratios and size

Main functions served Monetary control, Liquidity management
Domestic currency 4%
Foreign currency 4%
Average 4%
Required reserves INR 5245.10 bn
Required reserve as % of GDP 2.8%
Actual reserves INR 5390.55 bn
Actual reserve as % of GDP 2.8%

Main features of reserve requirements

Averaging Y
Carry-over N
Type Lagged
Maintenance period 2 weeks
end (day) Fri
Calculation period 2 weeks
end (day) Fri
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 Neutral position
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 loan
Pricing method MSF Rate (25 bps over the policy Repo Rate)
Maturity Overnight
Access limited by/to Collateral; scheduled commercial banks;
Function(s) Liquidity management

Standing facilities: deposit / market floor

Name Standing deposit facility announced; yet to be operationalised
Form N/A
Pricing method N/A
Maturity N/A
Access limited by/to N/A
Function(s) N/A

Open market operations: repo or reverse repo

Name/Type (i) Repo / reverse repo under LAF
(ii) 14-day Term repo
(iii) Fine-tuning Repo or Reverse repo
Maturity (i) 1 day, but could be more than 1 day due to intermittent holiday
(ii) 14-day
(iii) Varies
Frequency (i) 1 x day
(ii) Twice a week (every Tuesday and Friday)
(iii) As needed
Pricing method (i) Fixed rate
(ii) Auction
(iii) Auction
Access limited by/to (i) Scheduled commercial banks (SCBs), select Urban Cooperative Banks (UCBs) and primary dealers, select Scheduled State Cooperative banks (SSCBs).
(ii) SCBs, select UCBs and select (SSCBs).
(iii) SCBs, select UCBs and select (SSCBs).
Function(s) Liquidity management

Open market operations: central bank bills

Name SBI
Total issuance IDR 28.1 trn (as of end Sep 2018)
Maturity 12 months
Restrictions on possible maturities Up to 12 months
Pricing method Auction
Access limited by/to Banks
Discretion left to operational desk Maturity, size, timing

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 (i) Open market outright purchase/sales
(ii) OT (purchase and sales)
Form (i) Outright purchase and sales
(ii) OT (purchase and sales)
Frequency (i) As and when needed, at the discretion of the Reserve Bank
(ii) As needed
Maturity (i) Varies from auction to auction
Pricing Method (i) (1) Auction, (2) Market clearing price
(ii) Auction/Bilateral
Access limited by/to (i) (1) No restriction. Entities having securities account and funds account with the RBI can participate. (2) No restriction
(ii) Banks
Function(s) (i) Durable liquidity management
(ii) Liquidity management

Settlement systems and intra-day liquidity facilities

Settlement system RTGS
Intra-day liquidity facility Intra-day liquidity facility
Charge No charge
Foreign currency settlement system Yes; netting through a central counterparty with Settlement on delivery versus payment (DvP basis)
CLS participation by banks No. CLS services to Indian banks provided by Clearing Corporation of India Ltd (CCIL) as third party
Other settlement system(s) 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 Yes
Open market operations: List of eligible collateral Liquidity Adjustment Facility : Central and State Government securities
Open market operations: Discretion of central bank on collateral Yes

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) Repo injection by 4 pm on the same day and information on complete LAF operation (including reserve repo and MSF) on next working day at 9 am.
(ii) Press release on the same day after the operation for variable rate fine-tuning operations (FTOs) 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) N/A
Deposit facility usage: Timing

Other information dissemination

Type (i) Cash balances of scheduled commercial banks with RBI
(three-day lag); volume and average rate in call / CBLO / 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)
Channel(s) (i) Press release
(ii) Press release
(iii) Weekly Statistical Supplement (WSS) to the RBI Bulletin
(iv) RBI Bulletin
(i) to (iv) placed on the RBI website
Timing (i) 9.00 AM, Daily
(ii) 9.00 AM, Daily
(iii) Weekly
(iv) Monthly