The Reserve Bank of India (RBI) on Monday said its committee on monetary policy will review the operating procedure with respect to repo, reverse repo auctions; width of the interest rate corridor; and frequency and timing of reverse repo and repo auctions.In its quarterly policy review in July, the RBI had announced its plan to set up a panel to monitor the operating procedure of the monetary policy, including liquidity adjustment facility.
Rate corridor is the spread between repo rate -- the rate at which the RBI infuses liquidity -- and reverse repo rate -- the rate at which liquidity is drained out.
The panel will look at monetary policy in the light of global practices and domestic experience.
The terms of reference include:
* whether there is a need for a rate corridor at all
* whether its width should be fixed or variable
* what are the tools necessary to enable the corridor to function efficiently.
The committee will be headed by Deepak Mohanty, executive director, RBI.
The panel will also compare its monetary policy with operating methods of other central banks, the RBI said.
The RBI had introduced repo and reverse repo rates in June 2000 when it had started the liquidity adjustment facility.
Besides interest rates, other tools such as cash reserve ratio (CRR), open market operations (OMO) and market stabilisation scheme (MSS), have served the monetary policy management well, the RBI said.
"However, India's increasing integration with the global economy, large volatility in capital flows and sharp fluctuations in government cash balances have posed several challenges to liquidity management by the Reserve Bank, particularly in effectively signalling the monetary policy stance," the RBI said, explaining the rationale behind forming the panel.
The committee will also the assess the role of Bank Rate, which has been unchanged since April 2003 and is considered defunct now as no real interest rates are linked to this rate.
Bank Rate was used to signal change in interest rates over medium to long term, while repo and reverse repo rates are short-term rate tools.
