Keeping the weighted average call rate (WACR) aligned to the repo rate entails different levels of liquidity in deficit and surplus conditions, according to a RBI study.

Moreover, the extent of alignment is also contingent on the level of the lsurplus/ deficit.

The findings of an RBI study on “Optimal Level of Liquidity” suggest that surplus liquidity in the range of 0.6 to 1.1 per cent of NDTL (net demand and time liabilities) or deposits is likely to keep the WACR between 5 to 10 basis points (bps) below the repo rate (currently at 5.25 per cent).

So, in absolute terms, surplus liquidity should be in the ₹1,53,242 crore to ₹2,80,943 crore range, going by the NDTL of all scheduled banks as on March 30, 2026. This will keep the WACR between 5.20-5.15 per cent.

Liquidity deficit in the range of 0.4 to 0.7 per cent of NDTL is likely to keep the WACR above the repo rate between 5 to 10 bps.

In absolute terms, liquidity should be in the range of ₹1,02,161 crore to ₹1,78,782 crore. This will keep the WACR between 5.30-5.35 per cent.

The guiding principle of RBI’s liquidity management is to align WACR (the operating target of the monetary policy) with the policy repo rate. Liquidity mismatches could lead to deviation of the operating target from the policy rate, hampering monetary policy transmission.

Repo rate is the interest rate at which Banks’ borrows funds fron RBI to overcome short-term liquidity mismatches.

Call money market is a market for uncollateralized lending and borrowing of funds. This market is predominantly overnight and is open for participation only to scheduled commercial banks and the primary dealers.

The study noted that central banks actively manage liquidity conditions in the banking system to ensure that the operating target remains aligned to the policy rate, hovering within the interest rate corridor.

RBI officials noted that excessive liquidity surplus over a prolonged period runs the risk of driving short term interest rates to ultra-low levels, distorting risk perceptions and engendering asset price bubbles.

Moreover, persistently large surplus liquidity tends to lull market participants to a state of complacency in which they get accustomed to large liquidity.

In contrast, large deficit (shortage) in the banking system liquidity raises borrowing costs for banks, which constricts lending capacity, impedes monetary transmission and potentially undermines financial stability.

Therefore, it becomes essential to assess the optimal level of system liquidity in consonance with the monetary policy stance, the study said.

Published on April 12, 2026