RBI panel for retaining WACR as operating target of monetary policy

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.

- ANJALI KUMARI

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 collateralized 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.