RBI to review liquidity management framework in FY20
Mumbai, Aug 29 (IANS) The Reserve Bank of India (RBI) will refine its liquidity forecasting framework, sharpening the estimation of currency in circulation at various frequencies as part of the overall review of liquidity management, the central bank said in its annual report released on Thursday.
To enhance the understanding of monetary transmission, an analysis of sectoral credit flows would be undertaken. The implications of the asset quality or health of the banking sector and NBFCs on credit flows to the commercial sector would also be examined, the RBI said.
The RBI report further said that an analysis of the recent food inflation dynamics will be carried out to understand the sources of volatility and to examine the relative role of cyclical and structural factors at play.
In its annual report for 2018-19, the apex bank said that focus of its monetary policy operations in the ongoing fiscal would also include refinining the liquidity forecasting framework along with sharpening the estimation of currency in circulation at various frequencies.
"During 2019-20, the focus will be on refining the liquidity forecasting framework, sharpening the estimation of currency in circulation at various frequencies (such as yearly, quarterly, monthly, fortnightly and weekly) and an overall reviewing of operational aspects of the liquidity management framework, including aspects relating to structural liquidity balance and distributional asymmetry in liquidity," the RBI report said.
"The nature of spatial dimensions of inflation will be studied to better understand the divergences in inflation rates across major groups/sub-groups and changes in them over time," it said.
As per the report, operations in the last fiscal was guided by the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent with a tolerance band of '+/- 2 per cent', while supporting growth.
It added that inflationary pressures emanating from volatile international crude oil prices, and currency depreciation in the first half of the year, cooled down markedly in the second half, driven down by moderation in crude oil prices and a collapse in food prices.
"CPI inflation averaged 3.4 per cent in 2018-19; 4.3 per cent in the first half and 2.5 per cent in the second half. These diverse movements were reflected in the voting pattern of the monetary policy committee (MPC)," the RBI report said.
Forex operations by the RBI and large currency expansion exacerbated the pressure on system level liquidity during 2018-19, warranting active liquidity management through a variety of instruments, including regular repos and reverse repos under the liquidity adjustment facility (LAF), fine-tuning variable rate auctions of both repos and reverse repos, outright open market operations (OMOs) and foreign exchange swaps, it said.
The deposit and lending rates of banks reflected the movements in the policy repo rate during the year though transmission remained uneven across sectors, reflecting varied credit demand conditions and credit risk, the report said.