RBI working group recommends retaining WACR as policy target, liquidity framework

Reserve Bank of India

The internal working group of the Reserve Bank of India (RBI) has recommended to continue overnight weighted average call rate (WACR) as the operating target of monetary policy, governor Sanjay Malhotra said on August 6.

The working group found WACR to be effective in transmitting signals to other money market instruments across maturities.

The group is also in favour of continuing with the variable rate auction mechanism for repo and reverse repo operations to maintain the operating target rate at the policy rate.

Malhotra said working group has reviewed the RBI’s Liquidity Management Framework (LMF), operative since February 2020, and submitted its report, which would be put on the website shortly for public consultation.

The working group also found WACR to be “highly correlated” with other overnight money market rates (TREPS and Market Repo) in the collateralised segments.

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Banking system liquidity, which was in deficit till April, turned surplus after the central bank started infusing durable liquidity through open market operations (OMO) purchases and USD/INR Buy/Sell swap auctions. Along with this, liquidity was also supported by daily variable repo rate (VRR) auctions. All these measures helped banking system liquidity to turn surplus and remain in surplus mode.

In the June policy, the RBI cut cash reserve ratio (CRR) to give a boost to liquidity. The move will add Rs 2.5 lakh crore liquidity to the banking system. The CRR cut is scheduled in four tranches of 25 basis points each, starting from the fortnight beginning September 6, followed by October 4, November 1 and November 29.

After going for three cuts in a row this year, the RBI decided to keep the repo rate unchanged at 5.5 percent and the policy stance “neutral”.