RBI Revised Liquidity Management Framework: WACR Target
Why in the news
Ahead of its policy decision, the RBI announced a revised liquidity management framework in which WACR stays the target that policy steers.
Main changes
- Goal: keep short-term market rates near the policy repo rate for smooth transmission.
- Phased out: 14-day VRR and VRRR as primary tools.
- Replaced by: mainly 7-day operations, supplemented by overnight to 14-day ones as liquidity needs.
- Continuing: OMOs, forex swap auctions and longer-tenor variable rate repo or reverse repo operations, used for lasting liquidity.
| Corridor part | Instrument | Position |
|---|---|---|
| Midpoint | Policy repo rate | Centre |
| Floor | Standing Deposit Facility (SDF) | 25 bps below repo |
| Ceiling | Marginal Standing Facility (MSF) | 25 bps above repo |
Other points
- Standalone primary dealers keep SDF access, the overnight reverse repo and every repo operation.
- RBI will try to hold WACR near repo through optimal liquidity.
- At least one day’s notice of tenor, amount and timing of operations, barring exceptional cases.
- Banks must keep 90% of prescribed CRR every day.
Key terms
- WACR: average overnight interbank lending rate.
- SDF: banks park surplus funds without collateral; policy floor.
- MSF: overnight borrowing against securities; lender of last resort and ceiling.
- OMOs: buying or selling government securities.
- Forex swap auctions: rupees swapped for foreign currency with banks.
- CRR: share of NDTL banks hold with RBI.
Exam angle
- Operating target: WACR.
- Corridor width: 25 bps each side of repo.
- New primary tool: 7-day operations.