You Are Here: Monetary Policy > Revisions in Policies
Revisions in Monetary and Foreign Exchange Policies
An interest rate corridor was implemented to enhance the effectiveness and transparency of monetary policy implementation. The applicable rates on the Standing Credit Facility (SCF) and the Standing Deposit Facility (SDF) serves as the ceiling and floor of the short-term interest rate corridor, respectively. The rates and width of the corridor will be reviewed and published on a quarterly basis, following Board approval.
The corridor is expected to guide financial institutions in setting their interest rates as well as assist economic agents in making informed financial decisions. In addition, short-term interest rates are anticipated to become more sensitive to monetary policy signals and better reflect market expectations.
Consistent with its aim of improving liquidity management in the financial system and promote an active interbank market, the Bank revised its rates on the Standing Facilities. Interest rate on the Standing Deposit Facility now stands at 1.75% whilst interest rate on the Standing Deposit Facility now stands at 0.25%.
Remuneration rate on Minimum Reserve Requirement (MRR) for Rupee deposit liabilities was lowered to 0.0 per cent effective July 15.
Minimum reserve requirement on rupee deposits was increased by 3 percentage points to 13 per cent on April 01. This was done to minimise the potential effect of the current domestic liquidity overhang and rising external inflationary expectations on price stability.
In addition, whilst MRR on foreign exchange deposits was also increased by 3 percentage points, revisions were undertaken on an incremental basis of 1 percentage point per month.
Remuneration rate on Minimum Reserve Requirement (MRR) for Rupee deposit liabilities was lowered to 0.50 per cent effective February 01.
Remuneration rate on Minimum Reserve Requirement (MRR) for Rupee deposit liabilities was lowered to 0.75 per cent effective October 01.
A downward revision of the interest rate on Minimum Reserve Requirement (MRR) to 1.00 per cent was implemented on August 01. Latest macroeconomic developments and forecasts suggested more downward revisions were necessary to support conditions required for sustainable growth, albeit without compromising the main objectives of the Central Bank.
Following Board review, a new instrument, Foreign Exchange Swap for liquidity management (FX Swap), and revisions in the Deposit Auction Arrangement (DAA) facility were both approved in August. An FX Swap for liquidity management by the Bank will involve the exchange of a given amount of rupees against a foreign currency at an agreed exchange rate on an agreed date (spot date), and then a re-exchange of these two currencies on a later date (forward date), also at an agreed exchange rate. The exchange rates are agreed at the time the swap is entered into.
Amendments made to the DAA facility were a lengthening of its maturity profile and revising the way the interest rate is determined. The DAA maturity profile was extended to include multiples of 7 but no greater than 3 months or 91 days from its existing term structure of 7, 14 and 28 days. The Bank also has reserved rights to close or suspend any existing duration and/or offer other new maturity terms. With regards to interest rate determination, the amendments gave the Bank the authority to fix rates when deemed necessary. In exceptional cases where the Bank feels the need to steer the interest rates, it may decide to fix the interest rates on any or all offered maturities. The rates may be fixed at any rate and may be determined from a previous auction conducted on the same day of a market instrument of identical maturity. These changes should give the Bank more leeway in the use of the instrument, so as to improve its effectiveness in the transmission of monetary policy.
The Terms of Reference of the Monetary Operations Committee (TOR-MOC), which is the body established by the CBS Board with the responsibility to formulate and oversee the implementation of monetary policy within the general guidelines determined by the CBS Board, was amended to stipulate that during the absence of the Governor and the Deputy Governor the Head of PMOSD shall assume the role of Chairmanship. In addition, in the event that the Governor cannot attend the meeting, the Office of the Governor will be represented by the Director of Corporate Affairs, with the representative having no voting power.