The weighted average call rate (WACR) and the Mumbai Interbank Offer Rate (MIBOR) are two crucial interest rates in the Indian financial system, but they serve different purposes and are calculated differently.
Weighted Average Call Rate (WACR): WACR is essentially the average rate at which banks in India borrow funds from one another in the call money market, typically for short-term durations (usually overnight). It reflects the liquidity conditions in the banking system. The Reserve Bank of India (RBI) considers WACR as an important benchmark to assess the repo rate and monetary policy effectiveness. A higher WACR can indicate tight liquidity, while a lower WACR may suggest ample liquidity.
Mumbai Interbank Offer Rate (MIBOR): MIBOR, on the other hand, is the rate at which banks lend to each other in the Indian interbank market. It is primarily used as a benchmark for various interest rates in loans and derivatives. Unlike WACR, which is based on actual transactions in the call money market, MIBOR is determined through a survey of banks that report their offered rates, and it can have different tenors such as overnight, one week, and one month.
Key Differences:
- Calculation: WACR is derived from actual borrowing transactions, while MIBOR is based on banks’ perceived lending rates.
- Tenor: WACR mainly pertains to overnight borrowing, whereas MIBOR can include several time frames.
- Purpose: WACR is more focused on interbank liquidity, while MIBOR acts as a benchmark for various financial products and can indicate borrowing costs throughout the economy.
Understanding the distinctions between these two rates is essential for analyzing the Indian financial markets, as they provide insights into market liquidity and borrowing costs respectively.