Measures to ensure that the WACR (weighted average call rate) largely stays at the repo rate are required, as they would bring down short-term rates and are part of the natural development of the liquidity adjustment framework that supports inflation targeting, according to monetary policy committee external member Ashima Goyal.

The daily WACR has often exceeded the repo rate (6.50 per cent) in the past few months, said Goyal, who is an Emeritus Professor at the Indira Gandhi Institute of Development Research.

The LAF (liquidity adjustment facility) corridor effectively defines the operating procedure of monetary policy. Once the policy repo rate is announced, liquidity operations are conducted to keep the WACR closely aligned to the repo rate.

“Just as the tightening cycle started by withdrawing liquidity... and as expected, real rates rise, measures to ensure the WACR largely stays at the repo rate are required,” the professor said.

Even if the WACR exceeding the repo was due to unprecedented and extended large government cash balances, the toolkit to counter these and the many other shocks to which liquidity in India is subject to, can be expanded and activated, opined Goyal.

“Part of surplus government cash balances are already considered for VRR (variable rate repo) auctions; cash management itself can be improved, and government borrowing staggered.

“Moving to the just-in-time mode would save interest costs. Money market timings can be extended and market microstructure developed to enable banks to lend to each other,” she said.

Goyal emphasised that banks are the only conduits of liquidity to the rest of the financial system, and they tend to hoard liquidity if it is tight.

“Since non-bank financial intermediaries do not have access to a lender of last resort and penalties for credit default are now high, they also tend to hold excess liquidity. As a result, large swathes of the credit system do not get serviced,” she said.

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