RBI recommended Use of Repo Rate as Single Policy Rate

The Reserve Bank of India (RBI) to signal its policy stance, on 15 March 2011 recommended the use of the repo rate as a single policy rate in line with global practice. The central bank's working group prepared a report on operating procedure of monetary policy. In the report it was suggested that liquidity should be maintained in a deficit mode for effective policy transmission. It was specified that repo rate should be the single policy rate to unambiguously signal the stance of monetary policy to achieve macroeconomic objectives of growth with price stability. The repo rate, the rate at which the central bank lends to banks currently stands at 6.50% while the reverse repo rate, at which it borrows from banks is at 5.50%.

The report recommended reactivating the Bank Rate, also known as the discount rate. The Bank Rate was the refinance rate that existed prior to the current liquidity adjustment facility (LAF), which the central bank uses to manage liquidity. Before the LAF came into existence in June 2000, the RBI used to extend refinance to banks at the Bank Rate.

The Bank Rate is recommended as the upper bound of the rate corridor and banks can dip into an additional 1% of their deposits. Inclusion of oil bonds under the list of collateral for reverse repo auction was also recommended.

The central bank sought feedback on the report from banks and market participants by end of March 2011.