RBI Panel: WACR as Monetary Policy Target

Mumbai, Aug 6 (PTI) An RBI internal group has recommended continuation of overnight Weighted Average Call Rate (WACR) as the operating target of monetary policy.

The group has also recommended to continue with the variable rate auction mechanism for repo and reverse repo operations of various tenors with the objective of maintaining the operating target rate at the policy rate.

Report of the Internal Working Group (IWG) to review the extant Liquidity Management Framework, which has been in operation since February 2020, has been published on the RBI's website for stakeholders' comments till August 29.

The 7-member IWG was headed by Deputy Governor Poonam Gupta.

Under the existing Liquidity Management Framework (LMF), the WACR is the operating target of monetary policy.

The objective of liquidity management operations is to align the target rate to the policy repo rate.

"The group recommends continuation of overnight Weighted Average Call Rate as the operating target. The Reserve Bank may, however, continue to keep track of rates in other overnight segments to ensure orderly evolution of money market rates and smoothen transmission," the report said.

Liquidity management is the operating procedure of monetary policy, primarily aiming to align the targeted money market rate to the policy rate, to achieve the first step in monetary policy transmission.


An effective LMF facilitates the maintenance of appropriate liquidity in the banking system and fosters money market development, the report said.

Earlier in the day, Governor Sanjay Malhotra said the WACR is found to be highly correlated with other overnight money market rates (TREPS and Market Repo) in the collateralised segments.

Further, WACR is also found to be effective in transmitting signals to other money market instruments across maturities, he said.

The internal group has also suggested continuation of the existing corridor system with policy repo rate at the middle of the corridor.

"The corridor would remain symmetric, with SDF rate and MSF rate, which are 25 basis points away from the policy repo rate, acting as the lower and upper bounds of the corridor, respectively," the report said.

The LAF under the current LMF is based on the corridor system, with the policy repo rate in the middle of the corridor, the Marginal Standing Facility (MSF) rate (25 basis points above the policy repo rate) as the ceiling and the Standing Deposit Facility (SDF) rate (25 basis points below the policy repo rate) as the floor.

Further, to reduce uncertainty in the market about the tenor, quantum and timing of the repo/reverse repo operations, the group felt that it is desirable for the Reserve Bank to provide sufficient advance notice to market participants, at least by one day, while conducting any such liquidity operation.

The panel noted that the set of instruments in the extant LMF, viz., Open Market Operations (OMOs), long-term VRR/VRRR operations and Foreign Exchange (FX) swap auctions, are sufficient for managing durable liquidity in the system and hence does not recommend any change at this stage.

It also recommended the central bank to retain the extant daily minimum requirement of 90 per cent of the prescribed Cash Reserve Ratio (CRR).