Drivers of WACR-Repo Rate Spread: An Empirical Analysis of India

Abstract

The spread between the policy rate and operating target rate of the Reserve Bank of India (RBI) has consequences on the transmission of monetary policy signals. Using weekly data from 2011 to 2020 (504 observations), the study employs variants of General Auto Regressive Conditional Heteroskedastic model to comprehensively analyse the factors that drive this spread. Besides the factors retrieved from the literature, this study also gauges the impact of COVID-19 on the spread and its volatility. The results indicate that the spread is significantly impacted by its lag, volume of transactions in the counterpart markets, distribution pattern of the liquidity by the central bank, foreign market intervention, liquidity adjustment facility (LAF), currency in circulation and reserve requirement while market expectations and government cash balances are found to be non-significant. Besides, announcement effect of COVID and changes in key rates are found to be significant. The results of Exponential GARCH do not find significant asymmetry in response to positive and negative shocks on the spread. Volatility in the spread is comparatively more responsive to its lags than to the market shocks.