Context:
Amid global uncertainties and market volatility, the Reserve Bank of India’s internal working group has reaffirmed the Weighted Average Call Rate (WACR) as the most suitable operational target for monetary policy, citing its alignment with policy stance and regulatory control.
Key Recommendations of the RBI Working Group:
1. Retain WACR as the Operating Target
- WACR (Weighted Average Call Rate):
- The average interest rate at which banks borrow money from each other overnight in the unsecured market.
- Why Retain?
- It accurately reflects the RBI’s liquidity stance and transmits policy changes effectively as it includes credit and counterparty risk, unlike collateralized instruments.
2. Discontinue 14-Day VRR/VRRR as Main Liquidity Operation
- VRR/VRRR (Variable Rate Repo/Reverse Repo):
- Auctions where the interest rate is determined by market bids; used to inject (repo) or absorb (reverse repo) liquidity.
3. Use 7-Day or Shorter-Tenor Operations for Fine-Tuning
- Tenor:
- The duration or term of a financial contract or instrument.
- Why Shorter Tenors?
- Operations of up to 7 days offer greater flexibility to manage day-to-day liquidity pressures efficiently.
4. No New Tools Required
- FX Swap Auctions:
- RBI buys or sells foreign currency while agreeing to reverse the transaction later to adjust rupee liquidity.
5. Current Instruments Are Adequate:
- Open Market Operations (OMOs):
- RBI buys/sells government securities to manage money supply.
- Long-term VRR/VRRR:
- Used for durable liquidity adjustments with longer tenors (e.g., 1 month, 3 months).
