RBI panel for retaining WACR as operating target of monetary policy

The group was set up to the existing review of the Liquidity Management Framework which is in place since February 2020

An internal working group of the Reserve Bank of India (RBI) recommended retaining the overnight weighted average call rate (WACR) as the operating target for monetary policy, citing its effectiveness in policy transmission.

 

It also suggested discontinuing the 14-day variable rate repo (VRR)/reverse repo (VRRR) auction as the main liquidity operation.

 

Instead, it called for managing short-term liquidity primarily through 7-day and other shorter-tenor repo/reverse repo operations, up to 14 days, at RBI’s discretion.

 

The group was set up for the existing review of the liquidity management framework which is in place since February 2020.

 

“The participants in the call money market include banks and standalone primary dealers (SPDs), both of which not only have access to RBI’s liquidity adjustment facility (LAF) but are also under the regulatory purview of the central bank. In other words, the RBI has the maximum lever over WACR as compared to any other overnight money market rate,” the report said.

 

The report added that WACR directly influences short-term interest rates and effectively conveys the central bank’s stance on liquidity and monetary conditions. 

 

Unlike collateralised rates, it more accurately reflects credit and counterparty risks, and since central banks are the sole suppliers of reserves, they have greater control over this rate.

 

A stable and predictable uncollateralised rate also supports smoother monetary policy transmission by anchoring rates across maturities.

 

It further said that while the collateralised segments, such as tri-party (Treps) and market repo, comprise a large share of overnight market volume, they are heavily influenced by non-bank participants like mutual funds, insurance companies, and pension funds. These fall outside the RBI’s regulatory scope.

 

Despite this, WACR and collateralised rates show a high degree of correlation and alignment over time, the report highlighted.

 

Share of the call money market in total overnight money market volumes has declined over the years, raising questions about its effectiveness as the operational target of monetary policy.

 

Between financial years 2014–15 and 2024–25, the annual turnover in the overnight money market rose significantly from ₹281.37 trillion to ₹1,324.05 trillion, and the daily average turnover increased from ₹1.17 trillion to ₹5.52 trillion.

 

This sharp growth was driven almost entirely by expansion of the collateralised segment, whose turnover jumped from ₹245.27 trillion to ₹1,296.62 trillion.

 

In contrast, turnover in the uncollateralised call money market declined from ₹36.10 trillion to ₹27.42 trillion in the same period. 

 

A segment of the market was expecting the central bank to change the operating target to collateral-based Treps rate.

“There were expectations of shifting the operating target to the Treps rate as it is more secure and collateral based. It also has the highest volume in the overnight money market,” said the treasury head at a private bank.

 

To reduce market uncertainty, the group suggested that the RBI provide at least one day’s prior notice for such operations, while retaining the flexibility to conduct same-day operations when needed.

 

Additionally, the group advocated continuing the use of variable rate auctions, given their superior price discovery and efficient allocation of reserves.

 

For situations involving more persistent liquidity mismatches, it recommended deploying longer-tenor variable rate operations. This is to ensure liquidity assurance and reduce reliance on frequent short-term interventions. 

 

The report said that banks are generally hesitant to deploy surplus funds in the 14-day reverse repo auctions, instead preferring the daily standing deposit facility (SDF).

 

While participation in fine-tuning VRRR auctions has been higher, the frequent use of these operations contributes to market uncertainty around the RBI’s liquidity management approach.

 

This reluctance largely stems from banks' limited visibility on frictional factors, such as fluctuations in the central government’s cash balances, which complicate liquidity forecasting over a 14-day horizon.

 

Hence, the effectiveness of 14-day operations in addressing transient liquidity is limited.

 

Further, the report suggested that the existing set of instruments under the liquidity management framework, including open market operations (OMOs), long-term VRR/VRRR operations, and foreign exchange (FX) swap auctions, are adequate for managing durable liquidity and therefore do not require any changes at this stage. 

Working group recommendations

• Discontinuing 14-day VRR, VRRR auctions as the main operation
• Managing short-term liquidity through 7-day and shorter-tenor repo/reverse repo operations, up to 14 days, at RBI’s discretion.
• At least one day’s prior notice for liquidity operations to reduce uncertainty, though same-day operations can be used when needed
• OMOs, long-term VRR, VRRRs, and FX swaps  are adequate to manage liquidity