Weighted Average Call Rate (WACR)

India’s central bank has signalled that the weighted average call rate (WACR) is its operative rate and aims to keep it closely aligned with the policy repo rate.
Call Money Rate (WACR)
•  The call money rate refers to the interest rate at which banks borrow and lend funds to each other for very short durations, usually overnight. 
•  The Weighted Average Call Rate (WACR) represents the weighted average of these transactions and is considered the key operating target of monetary policy. 
•  Banks borrow in this market to manage short-term liquidity needs, including maintaining CRR and settling daily obligations.
Repo Rate
•  The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks against government securities. 
•  It serves as the primary policy rate to signal the stance of monetary policy.
Relation between Repo Rate and WACR
•  RBI aims to keep WACR close to the repo rate to ensure effective monetary policy transmission.
If WACR falls below Repo Rate
•  Banks prefer borrowing from each other instead of RBI due to cheaper funds. 
•  This weakens monetary policy transmission and may increase excess liquidity and inflationary pressures.
If WACR rises above Repo Rate
•  It indicates tight liquidity conditions in the banking system. 
•  Banks increasingly depend on RBI for funds through repo operations. 
•  Persistent divergence may signal stress in liquidity conditions.
In this manner, liquidity mismatches could lead to deviation of the operating target from the policy rate, hampering monetary policy transmission.
Therefore, the guiding principle of RBI’s liquidity management is to align WAACR with the policy repo rate.