WACR (Weighted Average Call Rate) is the interest rate at which banks lend to each other overnight. It reflects the short-term money market conditions and serves as a key operating target of the Reserve Bank of India (RBI) under its monetary policy framework. Changes in WACR directly indicate shifts in liquidity and interbank borrowing trends.
On 22 July, the WACR rose to 5.62%, which is higher than the RBI’s repo rate of 5.5%—the rate at which the central bank lends money to commercial banks. This marks the first time in this financial year that the WACR has moved above the repo rate, signaling tighter short-term liquidity in the banking system.
The rise in WACR is largely due to temporary liquidity outflows from the banking system, caused by:
As a result, the availability of short-term funds declined slightly, leading to an increase in overnight lending rates among banks.
As of Monday, banks maintained a liquidity surplus of ₹2.39 trillion, roughly around 1% of Net Demand and Time Liabilities (NDTL). This level aligns closely with the RBI’s target liquidity surplus, suggesting that the system remains largely balanced despite short-term fluctuations.
VRRR (Variable Rate Reverse Repo) is a key tool used by the RBI to absorb excess liquidity from the system. Since the liquidity surplus is already near the desired level, no fresh VRRR operations are expected in the immediate term. This provides banks with greater flexibility to lend and invest, as RBI may temporarily reduce its liquidity absorption efforts.
If the government increases spending in early August, it may inject additional liquidity into the system. In that scenario, the RBI could conduct new VRRR auctions to absorb excess funds and maintain monetary stability. For now, however, the WACR remains aligned with the RBI’s policy objectives, indicating a stable and well-managed liquidity environment.
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