Weighted average call rate

Weighted average call rate

Subject :Economy

Context:

Private banks continued to outpace public sector banks in credit growth, according to the latest RBI data.

Details:

• The share of private banks in total credit increased  to 38.4 per cent in September 2022 from 37.5 a year ago and 29.6 percent five years ago.
• Personal loans increased by 21.9 per cent in September 2022 accounting for one third of the total incremental credit.
• Credit growth in the industrial sector continued for the fourth successive quarter.
• The share of individuals in the total credit reached an all-time high of 44.4 percent in September 2022.
• Female borrowers accounted for 22.6 percent of borrowings by individuals.
• Deposits rose slowly at 9.9% compared to credit growth of 17.5% in the last one year.
• The short-term Weighted Average Call Rate (WACR) has increased to 6.18% as of December 16, 2022, due to liquidity issues in the banking Systems.

Cause of credit offtake?

• Low base effect due to Covid
• Rise in NBFCs
• Rise in the retail credit
• The higher working capital demand driven by inflation and improvement in capacity utilisation ratio
• Rise in demand for fresh capex

Concept:

The short-term Weighted Average Call Rate (WACR):

• Call money rate is the rate at which short term funds are borrowed and lent in the money market.
  • The duration of the call money loan is 1 day.
  • Banks resort to these types of loans to fill the asset liability mismatch, comply with the statutory CRR and SLR requirements and to meet the sudden demand of funds.
  • RBI, banks, primary dealers etc are the participants of the call money market.
  • Demand and supply of liquidity affect the call money rate. A tight liquidity condition leads to a rise in call money rate and vice versa
• The weighted average call rate (WACR) – which represents the unsecured segment of the overnight money market and is best reflective of systemic liquidity mismatches at the margin – is explicitly chosen as the operating target of monetary policy in India.
  • The operating procedure of monetary policy is guided by the objective of aligning the operating target of monetary policy – the WACR (weighted average call rate) –to the repo rate through active liquidity management, consistent with the stance of monetary policy.
  • Once the policy repo rate is announced, liquidity operations are conducted to keep the WACR closely aligned to the repo rate.
    • Liquidity management instruments include fixed and variable rate repo/reverse repo auctions, outright open market operations (OMOs), forex swaps etc.
    • A 14-day term repo/reverse repo operation at a variable rate conducted to coincide with the cash reserve ratio (CRR) maintenance cycle is the main liquidity management tool for managing frictional liquidity requirements.
    • The main liquidity operation is supported by overnight and/or longer tenor operations  to tide over any unanticipated liquidity changes.
    • Standalone Primary Dealers (SPDs) are allowed to participate directly in all overnight liquidity management operations.
  • If the weighted average call rate drifts towards the reverse repo rate-the lower bound of the monetary policy corridor–it will bring down the cost of funds of banks just as a rate cut would have.
• The  liquidity management corridor of RBI:
  • Marginal standing facility (MSF) rate as its upper bound (ceiling)
  • Standing deposit facility rate as the lower bound (floor)
  • Policy repo rate and reverse repo rate in the middle of the corridor.