Panel suggests a new liquidity approach using shorter repos while keeping the CRR minimum at the current 90%.
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Bloomberg
The Reserve Bank of India’s (RBI) internal working group reviewing the liquidity management framework (LMF) has recommended proposed retaining the overnight Weighted Average Call Rate (WACR) as the operating target and phasing out the 14-day variable rate repo and variable rate reverse repo auctions (VRR/VRRR) as the primary liquidity management operation.
“It is observed that WACR and rates in the overnight collateralised segments (Triparty Repo and Market Repo) display a high degree of correlation among them and are in close alignment across time horizons. WACR is also found to be effective in transmitting signals to other market rates…the Group recommends continuation of overnight Weighted Average Call Rate as the operating target,” the group said in its report.
Liquidity shift
According to Venkatakrishnan Srinivasan, founder at Rockfort Fincap, while the market share of WACR is minuscule, retaining it ensures central bank control. However, in the long run, a transition towards a hybrid or broader money market rate, with access to select non-bank regulated entities, could be considered—especially if money market structures evolve with better participation from mutual funds and other institutions.
Further, under the existing LMF, the 14-day VRR and VRRRs auction is the main operation to manage transient and short-term liquidity needs, supported by fine-tuning operations of overnight to 13-day tenors. However, analysis showed that while repo operations across tenors were generally over-subscribed, there was a general reluctance of banks to part with their surplus liquidity in 14-day main reverse repo operations, preferring instead, utilisation of the SDF facility daily.
“Therefore, the Group recommends that 14-day VRR/VRRR auctions may be discontinued as the main operation. Instead, the transient liquidity may be managed primarily through 7-day repo/ reverse repo operations and other operations of tenors from overnight up to 14 days at the discretion of the Reserve Bank based on its assessment of the system liquidity requirement.” The working group also suggested that the RBI retain the daily minimum requirementof 90 per cent of the cash reserve ratio, against banks’ request for a reduction to 85 per cent.
Says Jyoti Prakash Gadia, Managing Director at Resurgent India, “The findings of the report are however, on expected lines with no major changes recommended by the committee in the functioning of the market mechanism and per the existing operational guidelines, including those relating to the 90 per cent minimum maintenance of the prescribed benchmarks at all points of time. No changes are prescribed for the usage of existing tools, which are expected to be continued for the maintenance of adequate ease of operating in the market.”
Published on August 6, 2025
