RBI’s internal panel recommends continuation of WACR as operating target of monetary policy

mumbai: 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.