Source: BS
Context:
The Reserve Bank of India (RBI) has retained the overnight weighted average call rate (WACR) as the operating target of monetary policy, under a revised liquidity management framework, ahead of its upcoming monetary policy decision.
Key Announcements:
- The overnight Weighted Average Call Rate (WACR) remains the operating target of India’s monetary policy.
- Purpose: Align short-term money market rates with the policy repo rate for smooth transmission of monetary policy.
Changes in Operational Tools
- 14-day Variable Rate Repo (VRR) and Variable Rate Reverse Repo (VRRR) will be discontinued as primary liquidity management tools.
- They will be replaced primarily by 7-day liquidity operations, with additional operations ranging from overnight to 14 days depending on liquidity conditions.
- All existing instruments for durable liquidity management—like Open Market Operations (OMOs), long-term variable rate repos/reverse repos, and forex swap auctions—will continue.
Policy Corridor
- The symmetric corridor around the policy repo rate is retained:
- Repo Rate: Midpoint
- Standing Deposit Facility (SDF): Floor (25 bps below repo)
- Marginal Standing Facility (MSF): Ceiling (25 bps above repo)
- Banks’ access: Standalone primary dealers retain access to SDF, overnight reverse repo, and all repo operations.
Liquidity Alignment & Transparency
- RBI aims to keep WACR close to the policy repo rate by maintaining optimal liquidity.
- Advance notice of at least one day will be given regarding tenor, quantum, and timing of liquidity operations, except in exceptional circumstances.
Cash Reserve Ratio (CRR)
- Banks must maintain at least 90% of prescribed CRR daily.
Key Definitions
| Term | Definition | Significance |
|---|---|---|
| WACR | Weighted Average Call Rate — average overnight interbank lending rate | Operating target of RBI’s monetary policy |
| Policy Repo Rate | Rate at which RBI lends to banks for short term against government securities | Benchmark for market rates; controls inflation & growth |
| SDF | Standing Deposit Facility — banks can park excess funds without collateral | Floor of policy corridor; absorbs liquidity |
| MSF | Marginal Standing Facility — banks borrow overnight from RBI against securities | Ceiling of policy corridor; lender of last resort |
| VRR / VRRR | Variable Rate Repo / Reverse Repo — liquidity operations with variable interest rate | Discontinued as main tools |
| 7-day Liquidity Operations | RBI injects or absorbs liquidity for 7 days | New primary tool for short-term liquidity management |
| OMOs | Open Market Operations — buying/selling government securities | Manages durable liquidity |
| Forex Swap Auctions | RBI swaps rupees for foreign currency with banks | Manages forex liquidity & market stability |
| CRR | Cash Reserve Ratio — % of NDTL banks must maintain with RBI | Ensures liquidity & financial stability |
