According to sources close to the RBI, the technical committee on financial markets feels that the bank rate should be delinked from refinance rates and used purely as a signalling device. The standing committee is advisory in nature and, hence, cannot "recommend" the measures to be taken. The RBI brass has, however, taken the "views" of the committee seriously, and is working towards this end, the sources said.

The National Stock Exchange chief RH Patil and former Bank of India chairman MG Bhide are, among others, on the standing committee on financial markets.Former RBI governor C Rangarajan had brought the bank rate on the centrestage in April 1997 as a signalling rate, and cut it by one percentage point-from 12 per cent to 11 per cent-after a gap of six years. He also linked all interest rates on RBI advances-like the export credit refinance facility, liquidity support to primary dealers, the general line of credit to Nabard, and ways and means advances (WMA) to the Centre-to the bank rate.

To pave the way for the emergence of the bank rate as a reference rate, Rangarajan also introduced a new refinance facility to enable banks to tide over temporary liquidity shortages. "There is a need for developing the bank rate as a reference rate to signal the policy stance of the RBI. This would require rationalisation of the interest-rate structure and linking of interest rates to the bank rate," according to the April 1997 policy document.

The present thinking in the RBI is to delink the bank rate from all refinance rates and reposition it on the lines of the US Fed Rate to reflect the central bank's monetary policy stance. RBI governor Bimal Jalan is in favour of using the bank rate sparsely, and focus on other instruments like repo rates, etc, to send short-term interest-rate signals.

The RBI, in its April 1999 policy, had announced an interim liquidity adjustment facility (ILAF) to provide a mechanism for injection and absorption of liquidity available with banks from time to time. The ILAF is operated through a combination of repo, export credit refinance, collateralised lending facilities, and open market operations (OMO).

"The objective is to reserve the overnight call money market exclusively for banks and primary dealers, while all other players, like financial institutions, non-banking finance companies, and mutual funds, can participate in the repo market. We are moving in that direction," central bank sources said.

It is in the process of setting up a clearing corporation for repodeals. Once the full-fledged repo market takes off, the repo rate will be used as a short-term signalling device, and all liquidity support from the RBI will be delinked from the bank rate.

If the bank rate is repositioned on the lines of the US Fed Rate, the role of the repo rate will be similar to that of the Discount Rate. A combination of the two will direct the interest-rate movement, money market analysts said.

The RBI is likely to signal the repositioning of the bank rate in the forthcoming April credit policy.