India
India[INR]
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 Chaired by the Governor comprising six members - three internal and three external members nominated by the Government. |
|---|---|
| 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 |
Overview of key features
| Key policy rate | Repo rate |
|---|---|
| maturity (days) | |
| Operating target | Weighted average call money rate |
| maturity (days) | 1 (overnight) |
| Standing facilities | Lending of funds through Marginal Standing Facility (MSF); Deposit of funds through standing deposit facility (SDF) 2 |
| Corridor width (bp) | 50 bps since April 08, 2022 |
| Reserve requirements | Yes |
| maintenance period | 2 weeks |
| Main operation 3 | 14-day variable rate term-repo/reverse repo 4 |
| functions | For managing frictional liquidity requirements |
| maturity (days) | 14 days |
| regular interval | Yes |
| frequency | Fortnightly |
| Overall frequency | Fortnightly |
| 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 | √ (CRR) |
Monetary policy communication
| Explicit use of forward guidance | As communicated through the monetary policy resolution statement and/or Governor's policy statement |
|---|---|
| Timing / media of policy announcement | On a pre-announced time, on the last day of Monetary Policy Committee (MPC) Meeting when the MPC’s resolution is released on the central bank website following Governor's statement |
| Policy announcement and documents | Policy repo rate; Monetary Policy Resolution Statement |
| Explaining policy decisions | Detailed MPC Resolution; Governor's Statement and media conferences |
| 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 5 | 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 6 | NA |
Reserve requirements: ratios and size
| Main functions served | Monetary control, prudential regulation, Liquidity management |
|---|---|
| Domestic currency | 4.5% 7 |
| Foreign currency | - |
| Average | 4.5% |
| Required reserves | INR 7.64 tn ($96.4bn) 8 |
| Required reserve as % of GDP | 3.23% 9 |
| Actual reserves | INR 8.06 tn ($101.7bn) 10 |
| Actual reserve as % of GDP | 3.41% 11 |
Main features of reserve requirements
| Averaging | Yes with daily minimum requirement |
|---|---|
| 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 | N |
| Remuneration | N |
| average rate | |
| marginal rate | |
| Framework last changed | 05/2022 12 |
Liquidity position and forecasting
| Structural Position | Depending upon the stance decided by the MPC, based on its assessment of the current and evolving macroeconomic situation. |
|---|---|
| Most volatile factor(s) | Capital flows, Government cash flows |
| Most unpredictable factor(s) | Capital flows, Government cash 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 | Collateral; scheduled commercial banks (SCBs); select Urban Cooperative Banks (UCBs), select Regional Rural Banks (RRBs) and select Scheduled State Cooperative banks (SSCBs) |
| Function(s) | Liquidity injection |
Standing facilities: deposit / market floor
| Name | Standing deposit facility (SDF) 13 |
|---|---|
| Form | Uncollateralised deposit |
| Pricing method | SDF rate (25 bps below the policy repo rate) |
| Maturity | Overnight |
| Access limited by/to | Scheduled commercial banks (SCBs); select Urban Cooperative Banks (UCBs), Regional Rural Banks (RRBs), select Scheduled State Cooperative banks (SSCBs) and Primary Dealers |
| Function(s) | Liquidity absorption |
Open market operations: repo or reverse repo
| Name/Type 14 | (i) 14-day variable rate repo / reverse repo operation (main operation) (ii) Variable Rate Term Repo/Reverse Repo auction (Fine-tuning operations). (iii) If needed, longer-term variable rate repo/reverse repo operations |
|---|---|
| Maturity | (i) 14 days (ii) Overnight up to 13 days (iii) More than 14 days |
| Frequency | (i) Every 2 weeks (ii) Discretionary (iii) Discretionary |
| Pricing method | (i) Auction (Variable Rate) (ii) Auction (Variable Rate) (iii) Auction (Variable Rate) |
| Access limited by/to | (i) Scheduled commercial banks (SCBs), select Urban Cooperative Banks (UCBs), select Scheduled State Cooperative banks (SSCBs) and select Regional Rural Banks (RRBs). (ii) SCBs, select UCBs, select SSCBs and select RRBs. Primary Dealers can access all overnight operations. (iii) SCBs, select UCBs, select SSCBs, select RRBs |
| Function(s) | Liquidity management |
Open market operations: central bank bills
| Name | Not Applicable 15 |
|---|---|
| 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 16 |
|---|---|
| Frequency | Discretionary |
| Pricing method | Auction / Over the counter (OTC) at prevailing market rate |
| Access limited by/to | Authorised dealer category-1 banks |
| Function(s) | Liquidity management |
Other significant liquidity management means
| Name/Type 17 | Open market Operation (OMOs) 18 |
|---|---|
| Form | Outright purchase/sales |
| Frequency | At the discretion of the Reserve Bank |
| Maturity | Varies from auction to auction |
| Pricing Method | Auction / Trading Platform |
| Access limited by/to | No restriction. Entities having securities account and funds account with the RBI can participate. |
| Function(s) | Durable liquidity management |
Settlement systems and intra-day liquidity facilities
| Settlement system | RTGS |
|---|---|
| Intra-day liquidity facility | Intra-day liquidity facility / Liquidity Support Facility |
| Charge | No charge |
| Foreign currency settlement system | Yes; netting through a central counterparty with Settlement on payment versus payment (PvP basis) |
| CLS participation by banks | No 19 |
| Other settlement system(s) | Government Securities settlement through central counterparty (CCIL) |
Collateral
| Standing facilities: List of eligible collateral | Government securities including State Government securities and oil bonds |
|---|---|
| Standing facilities: Discretion of central bank on collateral 20 | Yes 21 |
| Open market operations: List of eligible collateral | Both outright and LAF (reversable) transactions : Central and State Government securities |
| Open market operations: Discretion of central bank on collateral 22 | Yes 23 |
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) | Publication of Money Market Operations (MMO) press release on RBI website |
|---|---|
| Lending facility usage: Timing | Next working day, at 9 am |
| Deposit facility usage: Channel(s) | Publication of Money Market Operations (MMO) press release on RBI website |
| Deposit facility usage: Timing | Next working day, at 9 am |
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 (one-day lag) (iii) Level and Variation in FX Reserves (one-week lag) (iv) FX Intervention during a month (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 (except for Saturday and Sunday) (ii) 9.00 AM, Daily (except for Saturday and Sunday) (iii) Weekly (iv) Monthly (v) 9.00 AM, Daily (except for Saturday and Sunday) |
1 Describe as well the legal status of the mandate and involvement of government
2 The Standing Deposit Facility (SDF) was introduced on April 08, 2022 - as an additional tool to absorb liquidity without any collateral requirement. The SDF replaced the overnight fixed rate reverse repo facility as the floor of the LAF corridor.
Apart from standing facilities for banks, there is collateralised liquidity support to primary dealers.
3 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).
4 Revised liquidity framework was put in place w.e.f. February 14, 2020.
5 For instance, economic and inflation forecasts related to policy decision.
6 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.
7 With effect from May 04, 2022.
8 Required reserves as on July 31, 2022, and exchange rate as of July 29, 2022
9 Nominal GDP figures for FY2021-22 and required reserves as of July 31, 2022
10 Actual reserves as on July 31, 2022 and exchange rate as of July 29, 2022
11 Nominal GDP figures for FY2021-22 and actual reserves as of July 31, 2022
12 Reserve Requirement was last increased by 50 bps in May 2022 to 4.50%
13 The standing deposit facility was notified in April 2018 and operationalised from April 08, 2022
14 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).
15 Not Applicable
16 The RBI has introduced FX swap auctions as an additional liquidity management tool in March 2019.
17 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.
18 Special OMOs (simultaneous purchase and sale) have also be conducted
19 CLS services to Indian banks provided by Clearing Corporation of India Ltd (CCIL) as third party
20 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.
21 The discretion over collateral for monetary policy operations is only limited by what is provided in the RBI Act, 1934.
22 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.
23 RBI has the discretion but so far restricted to Central and State government securities.