The RBI’s monetary policy tool kit that includes the instruments like repo, LAF often undergoes change. With time and finacnial sector developments new instruments may come. One such newly inducted instrument is the monetary policy corridor. As the name suggests, it indicate an area between two rates of the RBI’s monetary policy.
Monetary Policy Corridor refers to the area between the lower reverse repo rate and the upper ceiling rate of MSF rate. Reverse repo rate will be the lowest of the policy rates whereas Marginal Standing Facility is something like an upper ceiling with a higher rate than the repo rate. The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
Corridor and its monetary policy significance.
As per the monetary policy of the RBI, ideally, the call rate should travel within the corridor showing a comfortable liquidity situation in the financial system and economy.
The corridor structure for the policy rate is a helping guide for the RBI to design its monetary policy operations. Call money rate is the operating target of monetary policy. As far as the call rate lies within the corridor, there is not much liquidity disturbance in the system.
Figure: The Monetary Policy Corridor
The position of call rate is a suitable guide in designing the RBI’s liquidity stabilization response.
The above diagram shows the corridor movement from August 2017 to January 2019.
On March 27, 2020, the reverse repo rate is 4.0 % , whereas the MSF rate is 4.40% and the repo rate is 4.65%.
As part of the Covid 19 response package, the RBI brought down the repo rate, reverse repo rate and MSF rates. After this intervention, the corridor width increased to 65 pbs from 50 bps.
On March 27th, 2020, as part of the Covid 19 response package, the RBI reduced the policy rate of repo by 75 basis points from 5.15% to 4.40%.
An even higher reduction in reverse repo rate: The reverse repo rate has a been reduced by 90 basis points to 4 per cent.
The marginal standing facility (MSF) rate reduced to 4.65%.
So, the difference between Reverse repo rate and MSF rate widened from 50 bps to 65 bps.
This widened the gap or corridor between the two rate is quite asymmetrical according to the RBI.
Why the asymmetrical corridor?
During March so far, banks have been parking close to Rs 3 2 lakh crore on a daily average basis under the reverse repo, though the growth of bank credit has been slowing down.
Widening of the Monetary Policy Rate Corridor.
In view of persistent excess liquidity, it has been decided to widen the existing policy rate corridor from 50 bps to 65 bps.