November 6, 2024

The Reserve Bank of India (RBI) has been actively working to stabilize short-term lending rates in the banking system, ensuring that the weighted average call rate (WACR) remains aligned with the benchmark repo rate of 6.50%. This is part of RBI’s broader liquidity management efforts aimed at keeping market volatility in check while managing surplus liquidity in the system.

Key Measures by the RBI

To maintain stability, the RBI has been conducting a series of Variable Rate Reverse Repo (VRRR) auctions and Variable Rate Repo (VRR) auctions. These operations allow the central bank to absorb or inject liquidity into the system as required, helping control fluctuations in the overnight call rate and aligning it with the policy rate.

However, for the last four months, the tri-party repo (Treps) segment in the overnight market has seen rates consistently fall below the repo rate, highlighting a slight liquidity surplus. The Treps rate stood at 6.34% in October and 6.42% in September, approximately 12 basis points lower than the repo rate.

Why Liquidity Management is Crucial

Managing liquidity is a cornerstone of RBI’s monetary policy, as noted by Gaura Sen Gupta, Chief Economist at IDFC First Bank. According to Gupta, “In any stance, RBI aims to keep the WACR as close to the repo rate as possible.” By doing so, the RBI not only smoothens out short-term volatility but also creates an environment where market rates stay stable and predictable.

October and September Liquidity Data

RBI’s October data showed the WACR at 6.35%, slightly below the repo rate. This alignment was achieved through 14 VRRR auctions and other market operations. During this time, the banking system saw a liquidity surplus of ₹1.47 lakh crore, further illustrating the central bank’s active management of excess liquidity. The previous month, in September, the WACR was recorded at 6.52%, supported by VRR and VRRR auctions with a surplus of ₹1.05 lakh crore.

The Big Picture: Stability Above All

The RBI’s cautious approach aims to prevent sudden swings in market rates that could disrupt financial stability. “We want to ensure that market volatility is smoothened out,” an RBI official stated, emphasizing the use of fine-tuning operations to achieve this stability.

Why This Matters for Investors

For market participants like mutual funds, insurance companies, and banks, these measures bring much-needed stability to the overnight lending market. By keeping the WACR aligned with the repo rate, the RBI helps ensure that interest rates remain predictable, which is crucial for institutional investors relying on short-term funding.

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