RBI Policy Rate: No tango with repo, yet RBI moves ease rates

The Reserve Bank of India (RBI) may not have officially lowered policy rates yet or demonstrated any intent to do so in the immediate future, but a steady injection of funds over the past few weeks into a liquidity-parched financial system has helped achieve roughly the same objective as that of a formal start to the rate-easing cycle.

A broader trend decline in costs is evident in the latest prints of the weighted average call rate (WACR).

This represents overnight rate at which banks lend and borrow funds from one another in the call money market. After ruling at least a quarter percentage point above the RBI's repo rate for six consecutive months starting August 2023, the WACR has drifted toward the benchmark policy rate in February and March, central bank data showed.


"On liquidity, my guess is that the RBI raised rates to 6.5% and then did a silent 25-basis-point hike, which was reflected largely not just in overnight rates but also through T-bills and other such instruments," said Hitendra Dave, HSBC India CEO.

"Now that the RBI feels more confident, I think on liquidity, the silent hike has slowly been reversed," he said.

In March, call rate trended lower than the repo rate despite advance taxes, which had a March 15 payment deadline, draining banking system liquidity.

The rate of overnight borrowing, or call rate, is used as a pricing determinant for a host of credit instruments, including commercial papers and certificates of deposit.

Daily RBI data showed the average call money rate in February was at 6.52%, close to the prevailing repo rate of 6.50%.

In the current month, up to March 22, the average call rate is at 6.47%, the data showed.

This is in stark contrast to the previous six months, when the WACR broadly hovered around the RBI's Marginal Standing Facility, which is 25 basis points higher than the repo rate.

One basis point is a hundredth of a percentage point.

The central bank aims to align WACR with repo rate through proactive liquidity management.

State Spending

The broad factors behind the decline in call rate are an improvement in banking system liquidity due to a pick-up in government spending, consistent variable rate repo operations carried out by the RBI and the central bank's recent actions in the foreign exchange markets, treasury executives said.

While the RBI continues to signal vigilance on inflation amid volatile food prices, analysts said the tolerance of a lower call rate suggested comfort that consumer price pressures would now be broadly contained as against the large fluctuations witnessed last year.

"When the rate is the chief instrument of monetary policy, liquidity follows the rate. You have to move liquidity to achieve a certain rate," RBI deputy governor Michael Patra had said at the last monetary policy meet on February 8.

The RBI's tolerance of an elevated WACR for much of last year was likely a defence against inflation, as it meant high borrowing costs for banks and other corporates, thus pushing transmission of rate hikes.

By acting through liquidity and not raising the repo rate, however, the RBI ensured that the retail segment, such as mortgage borrowers, did not see a further rise in costs.

The repo rate is used as an external benchmark for several types of retail loans.