Decision on SFBs' transition applications soon

Some reports speculate re-introduction on VRRR to suck out some parts of the surplus liquidity and that CRR—as a liquidity tool, may be used more frequently.

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We would like to know if you are comfortable with weighted average call rate at the lower end of the corridor, given we are in the easing phase? Do you see CRR as a liquidity management tool or is it more of a safety net/buffer that needs to be maintained by banks?

The guiding principle of liquidity management framework of the Reserve Bank is to maintain the operating target of monetary policy, i.e., WACR close to the policy repo rate. However, it is not unusual for WACR to trade in the lower segment of the LAF corridor in surplus liquidity conditions. Also, keeping system liquidity in surplus helps transmission during the easing cycle. The Reserve Bank will continue to weigh the trade-off between keeping WACR closer to the SDF rate for better transmission or closely aligned to the policy repo rate as part of our framework and act accordingly.

I would like to emphasise that fine-tuning operations, whether through the VRRR or the VRR, do not impact durable liquidity. As stated earlier, we remain committed to maintain sufficient durable liquidity in the banking system.

As for CRR, it is one of the tools of monetary policy and a particularly potent one to manage durable liquidity. CRR used to be as high as 15 per cent in the eighties and was gradually reduced to 4 per cent by 2013. It has since been reduced only once, that too by only one per cent to infuse liquidity. 3 per cent of reserves seem adequate to be used as a monetary policy tool to provide liquidity, when needed.

Higher the reserves, lower is the money supply available for credit and higher the cost for the banks. The banks have been requesting for a lower CRR.

The reduction in CRR should be seen in this context. It would not be correct to infer that CRR will be used frequently for liquidity management.

There is a committee examining the liquidity framework? What are the key issues that the committee is looking at?