Average call, policy repo rate spread narrows as liquidity improves

The WACR moved in tandem with policy repo rate. Additionally, the overnight rates in collateralised segment - that is, triparty repo (TREPS) and market repo - broadly remained aligned with WACR

Reflecting the easing of liquidity conditions at the short end, the average spread between the weighted average call rate (WACR) and the policy repo rate narrowed to seven basis points (bps) in March 2025, down from a peak of 15 bps in December 2024, according to the monetary policy report.

 

However, the volatility in the WACR, measured by the exponentially weighted moving average (EWMA), remained high through March 2025. At times, the WACR even breached the upper bound of the interest rate corridor (the marginal standing facility or MSF rate), especially during the second half of December and early January.

 

The WACR moved in tandem with the policy repo rate. Additionally, the overnight rates in the collateralised segment — that is, triparty repo (TREPS) and market repo — broadly remained aligned with the WACR.

 

During the second half of December and early January, the WACR shot up, sometimes breaching the MSF rate, which was 6.75 per cent then.

 

This was partly attributed to the lower lending volumes in the call money market, as banks were unwilling to on-lend in the uncollateralised market at the quarter-end; instead, they preferred parking funds under the standing deposit facility (SDF).

 

Banks had parked record funds of around Rs 4.13 trillion under the SDF window, marking the highest amount banks had parked in the SDF since its introduction in April 2022.

 

“Softening in rates is cyclical in nature as liquidity is expected to slip into deficit again after outflows in the form of goods and services tax payments and slowdown in government spending. However, with continuous support from the RBI, rates will not shoot up and will not go beyond the MSF rate,” said an interbank call money trader with a state-owned bank.

 

The WACR moderated since mid-January with the introduction of daily variable rate repo (VRR), the policy repo rate cut in February, and the RBI’s liquidity-augmenting measures, the report said. In total, the RBI conducted four main and 62 fine-tuning VRR auctions to alleviate liquidity.

 

The report highlighted that the collateralised market — TREPS and market repo — continues to dominate money market transactions, with the share in overnight market volume remaining unchanged at 98 per cent. “Borrowing or lending in the interbank call money market is a last resort for any bank. And since in other markets we have more participants, rate discovery happens in a better and transparent manner,” said the head of treasury at another state-owned bank.

 

As per the report, mutual funds remained the major lenders in the TREPS market, with their share increasing to 67 per cent in the second half of FY25 from 65 per cent in the first half. Meanwhile, the share of mutual funds in the market repo segment went up to 46 per cent in the second half from 41 per cent in the first half, alongside a decline in the share of foreign banks to 31 per cent from 34 per cent. On the borrowing side, state-owned banks remained the dominant players in TREPS, although their share reduced to 40 per cent in the second half from 47 per cent in the first half. In market repo, however, their share increased to 6 per cent from 4 per cent over the same period.