&w=3840&q=100)
RBI panel for retaining WACR as operating target of monetary policy
It also suggested discontinuing the 14-day variable rate repo (VRR)/reverse repo (VRRR) auction as the main liquidity operation.
Instead, it called for managing short-term liquidity primarily through 7-day and other shorter-tenor repo/reverse repo operations, up to 14 days, at RBI's discretion.
The group was set up for the existing review of the liquidity management framework which is in place since February 2020.
'The participants in the call money market include banks and standalone primary dealers (SPDs), both of which not only have access to RBI's liquidity adjustment facility (LAF) but are also under the regulatory purview of the central bank. In other words, the RBI has the maximum lever over WACR as compared to any other overnight money market rate,' the report said.
Unlike collateralised rates, it more accurately reflects credit and counterparty risks, and since central banks are the sole suppliers of reserves, they have greater control over this rate.
A stable and predictable uncollateralised rate also supports smoother monetary policy transmission by anchoring rates across maturities.
It further said that while the collateralised segments, such as tri-party (Treps) and market repo, comprise a large share of overnight market volume, they are heavily influenced by non-bank participants like mutual funds, insurance companies, and pension funds. These fall outside the RBI's regulatory scope.
Despite this, WACR and collateralised rates show a high degree of correlation and alignment over time, the report highlighted.
Share of the call money market in total overnight money market volumes has declined over the years, raising questions about its effectiveness as the operational target of monetary policy.
Between financial years 2014–15 and 2024–25, the annual turnover in the overnight money market rose significantly from ₹281.37 trillion to ₹1,324.05 trillion, and the daily average turnover increased from ₹1.17 trillion to ₹5.52 trillion.
This sharp growth was driven almost entirely by expansion of the collateralised segment, whose turnover jumped from ₹245.27 trillion to ₹1,296.62 trillion.
A segment of the market was expecting the central bank to change the operating target to collateral-based Treps rate.
'There were expectations of shifting the operating target to the Treps rate as it is more secure and collateral based. It also has the highest volume in the overnight money market,' said the treasury head at a private bank.
To reduce market uncertainty, the group suggested that the RBI provide at least one day's prior notice for such operations, while retaining the flexibility to conduct same-day operations when needed.
Additionally, the group advocated continuing the use of variable rate auctions, given their superior price discovery and efficient allocation of reserves.
For situations involving more persistent liquidity mismatches, it recommended deploying longer-tenor variable rate operations. This is to ensure liquidity assurance and reduce reliance on frequent short-term interventions.
The report said that banks are generally hesitant to deploy surplus funds in the 14-day reverse repo auctions, instead preferring the daily standing deposit facility (SDF).
While participation in fine-tuning VRRR auctions has been higher, the frequent use of these operations contributes to market uncertainty around the RBI's liquidity management approach.
This reluctance largely stems from banks' limited visibility on frictional factors, such as fluctuations in the central government's cash balances, which complicate liquidity forecasting over a 14-day horizon.
Hence, the effectiveness of 14-day operations in addressing transient liquidity is limited.
Further, the report suggested that the existing set of instruments under the liquidity management framework, including open market operations (OMOs), long-term VRR/VRRR operations, and foreign exchange (FX) swap auctions, are adequate for managing durable liquidity and therefore do not require any changes at this stage.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Hans India
27 minutes ago
- Hans India
India's WPI inflation falls to 2-year low in July as food prices fall
India's annual rate of inflation based on the Wholesale Price Index (WPI) fell further in the negative zone to a two-year low of (-) 0.58 in July this year, compared to the same month of the previous year -- primarily due to a decrease in the prices of food articles and fuels such as petrol, diesel and natural gas, according to data released by the Commerce and Industry Ministry on Thursday. The WPI inflation for July is also lower than the -0.13 per cent that was recorded in the previous month of June. WPI-based inflation has been steadily easing since March and hit a 14-month low of 0.39 per cent in May. There was a 2.15 per cent decline in the food index while the cost of fuels such as petrol and diesel fell by 2.43 per cent during July compared to the same month of the previous year, resulting in the inflation rate turning negative. The decline in WPI inflation is also expected to lead to further easing of retail inflation as the drop in prices of bulk goods is passed on to the retail level and the decline in fuel prices leads to a drop in transport costs. Meanwhile, the country's inflation rate based on the Consumer Price Index (CPI) eased further to 1.55 per cent in July this year compared to the same month of the previous year as prices of food declined during the month. This is the lowest level of year-on-year retail inflation since June 2017, according to a statement issued by the Ministry of Statistics. The retail inflation in July was also lower by 55 basis points than the 2.1 per cent for the previous month of June this year which was the lowest level of retail inflation since January, 2019. Food Inflation in July this year fell into the negative zone at -1.76 per cent as prices declined compared to the same month of the previous year. The significant decline in headline inflation and food inflation during July, 2025 is mainly attributed to favourable base effect and to decline in inflation of pulses, vegetables, cereals, egg and sugar. The inflation rate also fell due to the decline in cost of transport and communication and education. Besides, there was a mild drop in housing inflation during the month. Meanwhile, the Reserve Bank (RBI) has pegged India's CPI inflation at 3.1 per cent for 2025-26 as the steady progress of the monsoon and robust kharif sowing are expected to keep food prices in check. RBI Governor Sanjay Malhotra recently said, 'The inflation outlook for 2025-26 has become more benign than expected in June. Large favourable base effects combined with steady progress of the southwest monsoon, healthy kharif sowing, adequate reservoir levels and comfortable buffer stocks of foodgrains have contributed to this moderation.' CPI inflation, however, is likely to edge up above 4 per cent by Q4:2025-26 and beyond, as unfavourable base effects, and demand side factors from policy actions come into play. Barring any major negative shock to input prices, core inflation is likely to remain moderately above 4 per cent during the year, he explained.
News18
36 minutes ago
- News18
RBI announces underwriting auction results for two government securities
Mumbai (Maharashtra) [India], August 14 (ANI): The Reserve Bank of India (RBI) on Thursday announced the results of the underwriting auction conducted for Additional Competitive Underwriting (ACU) of two Government of India securities, setting cut-off commission rates for primary dealers. According to the central bank, the auction was held on August 14, 2025, for the 6.01 per cent Government Security (GS) 2030 and a new Government Security maturing in 2055. The ACU process allows primary dealers to competitively bid for the right to underwrite additional portions of the notified amount of government bonds, over and above their minimum underwriting commitments. For the 6.01 per cent GS 2030, the notified amount was Rs 15,000 crore. The minimum underwriting commitment (MUC) stood at Rs 7,518 crore, with the remaining Rs 7,482 crore accepted under ACU. The total amount underwritten was thus Rs 15,000 crore. The cut-off commission rate for the ACU portion was set at 0.40 paise per Rs 100. In the case of the new GS 2055, the notified amount was Rs 13,000 crore. The MUC was Rs 6,510 crore, while the ACU amount accepted was Rs 6,490 crore, taking the total amount underwritten to Rs 13,000 crore. The ACU commission cut-off rate here was higher, at 0.78 paise per Rs 100. The RBI said that the actual auction for the sale of these securities would also be held on August 14, 2025, subsequent to the completion of the underwriting process. Underwriting of government securities is a critical function performed by primary dealers to ensure smooth borrowing operations by the government. In this system, primary dealers commit to subscribing to unsold portions of government bond issuances, thereby providing an assurance of full subscription. The ACU mechanism allows the government to allocate additional underwriting amounts through a competitive bidding process, where the commission rate is determined based on market demand. The RBI's announcement comes as part of its routine government securities issuance calendar, which is a key instrument for managing the fiscal requirements of the government and influencing liquidity in the financial system. Primary dealers, a select set of financial institutions authorised by the RBI, play an essential role in underwriting and distributing these securities in the secondary market. (ANI) view comments First Published: August 14, 2025, 13:45 IST Disclaimer: Comments reflect users' views, not News18's. Please keep discussions respectful and constructive. Abusive, defamatory, or illegal comments will be removed. News18 may disable any comment at its discretion. By posting, you agree to our Terms of Use and Privacy Policy.
Economic Times
an hour ago
- Economic Times
For risk-averse investors, SIPs in government bonds as close to a guaranteed return as one can get: Shweta Jain
Shweta Jain, Founder, Investography, says for risk-averse investors seeking short-term options, bond SIPs offer near-guaranteed returns backed by the Indian government. With maturities ranging from three months to a year and a minimum investment of Rs 25,000, these SIPs are ideal for parking funds intended for short-term needs. Investors can stagger maturities, roll over investments, or withdraw profits while reinvesting the principal. ADVERTISEMENT Let us get the background of this particular platform that is launched by RBI. It has been launched sometimes back and the awareness level is still really low because a lot of time investors do not know how to access it and what kind of products one can buy from these platforms. Give us a sense of this retail direct platform where investors can directly invest into government securities. Shweta Jain: It is interesting because this was launched to increase retail participation. Investors can now invest in T-bills directly and through different sorts of periods – 14-days, 91-days. There are different periods that they can do as well. But the awareness is quite low because not much effort is taken to promote it. Is investing in T-bills via SIP a smart move compared to FDs? I want to understand this from a financial planning angle now. We are talking about doing SIPs in treasury bills. What kind of investors should be going to these platforms? If at all they are investing in these kinds of products, what should be the average return expectation? Should return or profit be the priority when you are investing in these kinds of investment instruments or just safeguarding your money should be the priority? Shweta Jain: I am going to take the questions one by one. One, this is for an investor who is looking at short-term investments. This is not for somebody who is looking long-term. This is for somebody who is absolutely risk-averse. This is as close to a guaranteed return that you can get because the Indian government is promising to repay you at a later date, that is literally what it means. So, this comes with different maturity days. Ideally if you have a three-month horizon for example, a 91-day T-bill will suit you or a 182 days T-bill will suit somebody who has 6 months and 364-day somebody who has a year's horizon. Also the minimum amount should be about Rs 25,000. The other quite interesting thing is the way the SIP has been promoted and the fact that some of these can be used to either stagger your maturity or keep rolling these investments. It is also interesting for somebody who may be looking at short-term requirements, not necessarily deployed anywhere else because it is short term, say three months. The money might be lying in the bank, and so this is a great use. It is also quite interesting for somebody, who might need the money after three months, and who may not want to roll this over. It could be that they do this for three months and then withdraw the gain and then invest the principle again, for any of the tenures. It could be that you are taking out a little bit of profit. Looking at the bouquet that has been offered in RBI retail direct platform, which are the ones you would recommend for a long-term investment perspective? Considering these are mostly debt instruments and when we talk about financial planning or your portfolio planning, it is important to give that balance and stability in your portfolio through a debt investment. Among all of these investment instruments available in this bouquet, which ones would you prefer from a long-term perspective? How can you strategise these instruments for a long-term goal perspective? Shweta Jain: Absolutely. When goals are nearer, you want to withdraw the risk element out of it and these products can be a great help to mitigate that risk. Somebody who is absolutely risk averse or someone just starting can start SIP into these instruments. This SIP will be more comfortable for them and then they can go on towards long-term investments. ADVERTISEMENT For somebody who is looking at a hybrid portfolio, I would not recommend it, but somebody who wants to invest safely outside of FDs and RDs, this is a great opportunity. Unlock 500+ Stock Recos on App Since we are talking about a full-fledged investment strategy in these instruments, it is very important to caution our investors in terms of risk. We know no investment is risk-free. What are the risks associated with these investments as well? Shweta Jain: One is something which I would call the liquidity risk. While you can sell it in the secondary market, you are basically restricted to the amount of time that you have committed for. You can try and sell it in the secondary market, but that is the liquidity risk that you are talking about. It could be something that may be difficult to sell and that I would definitely call a risk. There are no other risks in terms of credit risk. ADVERTISEMENT The other risk of course is the interest rate risk. If the interest rate falls or rises tomorrow, like if the interest changes, then your earlier bonds might become more expensive or your future bonds might become more expensive. That could happen as well or could be more attractive, expensive or attractive. I think that interest rate risk is something that you could carry as well. But the best part is most new investors look at SIPs and link it to mutual funds. But because mutual funds are subject to market risk, they may not enter that, but here the SIP is in T-bills and so it could be a great entry point and then get into other longer duration investments whether it is equity or debt, whether it is mutual funds or other products. (You can now subscribe to our ETMarkets WhatsApp channel)
