Friday, 3 January 2014 00:00
The Monetary Board, at its meeting held on 27 December 2013 has decided to adopt the following new monetary policy measures:
1. The Monetary Board decided to establish a Standing Rate Corridor (SRC) in place of the current Policy Rate Corridor with immediate effect (See Figure 1). Accordingly, the following changes will take place:
a. The current Standing Repurchase Facility will be renamed as the Standing Deposit Facility (SDF), and the Standing Deposit Facility Rate (SDFR) will be the rate for the placement of overnight excess funds of the banking system
b. The current Standing Reverse Repurchase Facility will be renamed as the Standing Lending Facility (SLF), and the Standing Lending Facility Rate (SLFR) will be the rate for the lending of overnight funds to the banking system
c. Open Market Operation (OMO) auctions will continue unchanged, with Repurchase and Reverse Repurchase auctions, depending on liquidity conditions in the domestic money market
2. The Monetary Board was of the view that the requirement of providing collateral by the Central Bank to OMO participants under the Standing Deposit Facility was unnecessary, since the Central Bank is the monetary authority of the country. Accordingly, in consideration of the Central Bank’s zero credit risk in rupee transactions, the Monetary Board decided that, with effect from 1 February 2014, the Standing Deposit Facility will be uncollateralised. However, all other OMO transactions will remain collateral-based, as at present.
3. The Monetary Board also observed that the volatility in the interbank call money market has reduced substantially over time, and was of the view that a compression of the Standing Rate Corridor is now warranted. Accordingly, the Monetary Board decided to reduce the Standing Lending Facility Rate of the Central Bank by 50 basis points to 8% with immediate effect, thereby compressing the Standing Rate Corridor to 150 basis points from the current 200 basis points. It is expected that this compression will facilitate the reduction of the interest spread of banks over time, without affecting the deposit rates offered by banks to their customers.
4. The Monetary Board also reviewed the minimum cash margin requirement of 100% against Letters of Credit opened with commercial banks for the import of certain categories of motor vehicles, imposed on 30 August 2013. Considering the improvement in the external sector, the Monetary Board decided to remove this requirement with immediate effect.
The date for the release of the next regular statement on monetary policy would be announced in due course.