RBI’s Mohanty on success of new monetary policy framework

Reserve Bank of India Executive Director Deepak Mohanty offers positive feedback on central bank’s new operating framework

Deepak Mohanty, an Executive Director at the Reserve Bank of India (RBI), on Friday said the central bank's new monetary policy operating framework had improved the policy effectiveness, but that further challenges remained. On May 3, the RBI announced a revised monetary policy operating procedure, which improved upon the liquidity adjustment facility (LAF) framework and recognised the weighted average overnight call money rate as an explicit monetary policy operating target. At the Indian Institute of Management in Lucknow, India, Mohanty said: "While it is too early to judge the efficacy of the new operating procedure, experience of more than three months suggests that the overnight interest rate was more stable following the implementation of the new procedure." Mohanty said the new operating framework with the modified LAF meant the impact on the overnight interest rate was immediately transmitted through the term structure of interest rates. However, Mohanty said there remained three main challenges: keeping systemic liquidity consistently in a deficit mode; retaining the capacity to conduct longer-term liquidity management operations; and the ability to send effective transmission of policy signals to the operating target. "Needless to say, the success lies in the achievement of the ultimate objective of sustained growth with price and financial stability. This will require further deepening of financial markets and removal of structural rigidities coming in the way of market determination of interest rates," he said.

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