Demystifying WACR: The Key to Banking System Liquidity

What is WACR?

WACR stands for Weighted Average Call Rate. It is the average interest rate at which banks lend and borrow money from each other overnight — just for one day.

Why is WACR Important?

WACR reflects the short-term cost of money in the banking system. It helps the RBI monitor how easy or difficult it is for banks to get funds. If WACR goes up, money becomes costlier; if it goes down, liquidity is easier to access.

RBI’s Role

The Reserve Bank of India uses WACR as its operating target for monetary policy. By influencing WACR, the RBI can guide overall interest rates in the economy.

Connected Instruments

WACR is closely linked to other short-term money market instruments:

• Commercial Paper (CP): Short-term debt issued by companies to meet working capital needs.
  Example: A company like TCS may issue CPs for 3 months to raise ₹100 crore for operations.
• Certificate of Deposit (CD): Short-term fixed deposits issued by banks to raise money from other banks or institutions.
  Example: A public sector bank may issue a 90-day CD at 6.75% to mutual funds.
• Market Repo: Short-term loans between banks using government securities as collateral.

WACR influences these rates. If WACR rises, CP and CD rates often rise too.

Why RBI Prefers WACR

• It is market-based
• Reflects real-time liquidity conditions
• RBI has more control over WACR than other overnight rates
• Helps send clear signals to markets across various maturities