Weighted Average Call Rate

Also called: WACR · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT

Meaning

The Weighted Average Call Rate (WACR) is the average interest rate on one-day loans between banks in the call money market (the market where banks lend to and borrow from each other overnight). Each deal counts in proportion to its size, so bigger loans matter more.

It is the RBI's operating target, the day-to-day rate the RBI tries to keep close to the policy repo rate (the rate at which the RBI lends money to banks for a short time, against government bonds) [1]. If WACR stays near the repo rate, a change in the repo rate can pass on to all other interest rates in the economy.

Formula: WACR = Σ (rateᵢ × volumeᵢ) ÷ Σ volumeᵢ

Explanation

How WACR is calculated

• Every overnight call-money deal has two numbers: an amount (volume) and an interest rate.
• WACR is volume-weighted. A large loan pulls the average towards its own rate more strongly than a small loan does.
• Worked example:
• Deal A: ₹6,000 crore at 5.20%.
• Deal B: ₹4,000 crore at 5.35%.
• WACR = (6,000 × 5.20 + 4,000 × 5.35) ÷ 10,000
• = (31,200 + 21,400) ÷ 10,000 = 5.26%.

• This is very close to the repo rate of 5.25%, so the RBI is meeting its target.

• A simple average of the two rates would be 5.275%. The weighted figure is lower because the bigger deal was done at the lower rate.

Where WACR sits: the policy rate corridor

• The policy rate corridor (LAF corridor) is the band inside which overnight rates move [1][2]:
• Ceiling: Marginal Standing Facility (MSF) rate, an emergency overnight borrowing window at repo + 25 bps [1]. (100 bps = 1 percentage point.)
• Middle: repo rate.

• Floor: Standing Deposit Facility (SDF) rate, a collateral-free window where banks park spare cash at repo − 25 bps [1].

• Why WACR stays inside the band:

• No bank will borrow from another bank above the MSF rate, because it can borrow from the RBI at MSF instead.

• No bank will lend to another bank below the SDF rate, because it can park the money with the RBI at SDF instead.

• December 2025 corridor [3]:

Floor	Target zone	Ceiling
SDF 5.00%	Repo 5.25% (WACR should be near this)	MSF = Bank Rate 5.50%

• Width = 5.50 − 5.00 = 50 bps, with 25 bps on each side of the repo rate.

What makes WACR rise or fall

WACR depends on liquidity, meaning how much spare cash banks have.

• Liquidity surplus → WACR falls towards SDF (floor)
• Banks have extra cash and few borrowers.
• Lenders compete, so call rates drop below repo, towards 5.00%.

• The RBI runs a Variable Rate Reverse Repo (VRRR), an auction where banks bid to park spare funds with the RBI. This absorbs the extra cash and lifts WACR back to repo [1].

• Liquidity deficit → WACR rises towards MSF (ceiling)

• Banks are short of cash and many want to borrow.
• Call rates rise above repo, towards 5.50%.

• The RBI runs a Variable Rate Repo (VRR), an auction where banks bid for RBI funds. This injects cash and pulls WACR back down.

• Things that change liquidity without any RBI decision:

• Currency demand: during festivals and elections, people withdraw cash, so bank liquidity falls and WACR rises.
• Tax dates: money moves from bank accounts to the government's account with the RBI. Liquidity is drained and WACR rises.
• Government spending: money flows back to banks. Liquidity is added and WACR falls.
• RBI selling dollars (to support the rupee): banks pay rupees to the RBI. Liquidity is drained and WACR rises.
• RBI buying dollars: the RBI pays out rupees. Liquidity is added and WACR falls.

The chain of targets

• Repo rate (policy rate) → WACR (operating target) → other market rates → inflation (final goal).
• The RBI sets the repo rate, but it cannot directly fix WACR. It steers WACR by managing liquidity.

In India

• Who manages it: the RBI. Its operating framework aims to align the operating target (WACR) with the policy repo rate through active liquidity management [1].
• Main tool: the Liquidity Adjustment Facility (LAF), the RBI's system of repo, reverse repo and standing facilities. It began in June 2000, following the Narasimham Committee II.
• How the main operation has changed:
• Feb 2020 framework (announced 6 February 2020): the 14-day VRR/VRRR, timed to the fortnightly CRR maintenance cycle, was the main operation [4][2]. The CRR (cash reserve ratio) is the share of deposits a bank must keep as cash with the RBI.
  • Example: a 14-day VRRR of ₹2,00,000 crore on 15 January 2021 [4].

• Current framework (after the 2025 review): short-lived liquidity is managed mainly through the 7-day VRR/VRRR. Other operations from overnight to 14 days are used at the RBI's discretion [1].

• Standing facilities that fix the corridor edges:

• MSF (May 2011): lets a bank dip into its SLR securities up to 2% of NDTL [1]. SLR is the minimum share of deposits kept in safe assets like government bonds. NDTL is roughly the bank's deposits.

• SDF (April 2022): collateral-free. Its legal basis is Section 17(2A) of the RBI Act, 1934, inserted by the Finance Act 2018. It replaced the fixed-rate reverse repo (3.35% at the time) as the floor [1].

• Latest rates (5 December 2025 policy, neutral stance): repo 5.25%, SDF 5.00%, MSF and Bank Rate 5.50% [3]. WACR should trade near 5.25%. (Check the current rates before the exam.)

Don't confuse with

• Repo rate: this is the policy rate, which the RBI announces. WACR is the operating target, a market rate that the RBI steers towards the repo rate [1].
• Bank Rate: the RBI's rate for longer-term lending, kept equal to the MSF rate (5.50% in Dec 2025) [3]. It forms the ceiling of the corridor, not the target.
• SDF rate: the floor of the corridor (repo − 25 bps). WACR falls towards it only when liquidity is in surplus.
• Simple average call rate: gives every deal equal weight. WACR weights each deal by its volume, so large deals count more.

Prelims Hooks

• Operating target of RBI monetary policy = WACR. Trap: the repo rate is the policy rate, not the operating target [1].
• Formula: WACR = Σ (rate × volume) ÷ Σ volume. It is measured in the overnight call money market (bank-to-bank, one day).
• Corridor: floor = SDF (repo − 25 bps), ceiling = MSF (repo + 25 bps), width = 50 bps [1]. Dec 2025: 5.00% / 5.25% / 5.50% [3].
• Liquidity surplus → WACR moves towards SDF. Deficit → WACR moves towards MSF.
• Current main tool to keep WACR near repo = 7-day VRR/VRRR [1]. Under the Feb 2020 framework it was the 14-day VRR/VRRR [2][4].
• Things that push WACR up (drain liquidity): RBI selling dollars, advance-tax payments, festival cash demand. Government spending pushes it down.

Mains Points

• Transmission depends on liquidity, not just the rate decision:
• A repo cut helps borrowers only if WACR and other market rates follow it.
• In a liquidity deficit, WACR stays near MSF, so the cut does not reach borrowers.

• So liquidity tools (VRR/VRRR, OMOs, CRR) matter as much as the repo decision [1].

• Defending the rupee vs keeping money easy (GS-III):

• When the RBI sells dollars to support the rupee → rupee liquidity is drained → WACR rises towards MSF → credit gets tighter.

• This may clash with an easy-money stance, so the RBI must offset it with VRR or OMO purchases. This links external-sector management with domestic monetary policy.

• Reforms that make the target more reliable:

• The SDF (enabled by the Finance Act 2018) lets the RBI absorb large surpluses without running out of government bonds, so WACR does not fall through the floor.
• A narrow 50 bps corridor, a single target (WACR) and a short main operation (7-day, earlier 14-day) make the RBI's signal clear to markets. The cost is that the RBI has to operate in the market more often.

Related concepts

• Liquidity Adjustment Facility
• Variable Rate Repo
• Variable Rate Reverse Repo
• Marginal Standing Facility
• Standing Deposit Facility
• Policy rate corridor
• Banking system liquidity

Read more

• The operating framework: LAF, the corridor and WACR