Why is RBI Seeking Views on Aligning Call Money Rate with Policy Repo Rate?

Since April, liquidity in India’s banking system has surged. The weighted average call rate (WACR)—the key overnight interbank rate—has dropped sharply, often trading well below the repo rate.

On June 17, the call rate stood around 21 bps below the 5.50% repo, compared to just 10–15 bps in April when liquidity began easing. Now, RBI wants to align the call money rate with the policy repo rate. But why? In this article, we answer this question.

What is Call Money Rate & Repo Rate?

Before we get to the main topic, you must understand two key terms: Call Money Rate & Repo Rate.

Call Money Rate: Call Money Rate is the interest rate at which banks borrow money from each other for a very short period — usually for just one day. But why do banks need cash for a day? Good question! Sometimes, banks have to maintain a minimum Cash Reserve Ratio (CRR) with RBI. If they fall short of cash at the end of the day, they borrow from other banks with extra money — just for one night.

Repo Rate: Repo Rate is the interest rate at which RBI lends money to commercial banks, usually for short-term needs (not just one day), and against government securities as collateral.

The full form of REPO = Repurchase Agreement.

Why should these two rates not have too much divergence?

The short answer is that because RBI uses the Repo Rate to signal its monetary policy, and if the Call Money Rate (which is a real, market-based rate) moves too far from the Repo Rate, it means RBI’s policy is not working effectively.

Let us understand this in detail now. Think of these rates as below:

• Repo Rate = What RBI wants banks to follow (like a rulebook).
• Call Money Rate = What banks do in the real world.

If the two diverge a lot, there is a disconnect between RBI's intentions and market behavior. Let us understand the two scenarios:

Case 1: Call Money Rate << Repo Rate

Imagine a scenario where:

Repo Rate = 6.50%

Call Rate = 5.00%

This means that banks can borrow from each other at 5%, instead of borrowing from RBI at 6.5%. So why would banks ever go to RBI?

They won't. They will borrow from peers, right? It means:

• RBI loses control over the money supply.
• Monetary policy becomes ineffective.
• Extra cheap funds may lead to too much lending and inflation.

Case 2: Call Money Rate >> Repo Rate

Now imagine an opposite scenario:

Repo Rate = 6.50%

Call Rate = 8.00%

It means that there is a liquidity crunch. Banks are desperate and willing to pay high interest just to meet CRR or lending needs.

Now:

• Banks go running to RBI for repo loans.
• Too much demand might create pressure on RBI’s liquidity system.
• It also signals panic in the banking system, which is bad for financial stability.

Current Scenario & RBI Response

As mentioned earlier, the call rate is now below the repo rate, and RBI plans to do something about this. Here is RBI's strategic response;

• Seeking Feedback: The RBI has solicited insights from treasury officials to understand market functioning and potential tools.
• Liquidity Tools Under Review: These include discontinuing daily variable-rate repo, introducing variable-rate reverse repo (VRRR) auctions to mop up excess liquidity, and judicious use of the cash reserve ratio (CRR).
• Shifting Stance: The RBI recently cut the repo rate by 50 bps to 5.50%, moved from “accommodative” to “neutral,” and reduced CRR by 100 bps (effective September), signaling calibrated liquidity management.

What are the different impact areas?

Here are different impact areas and why it matters:

Before you go

The RBI’s efforts to realign the call money rate with the repo rate reflect a strategic balancing act:

• Preserve the effectiveness of its monetary stance
• Avoid unintended inflationary acceleration
• Ensure the smooth transmission of policy through financial markets - without triggering volatility in short-term rates.

The next few weeks—especially moves around VRRR and CRR—will be key to how well the RBI manages this transition.