Context:
The Reserve Bank of India (RBI) is currently re-evaluating its liquidity management framework, specifically the use of the Weighted Average Call Rate (WACR) as the key indicator for policy transmission. Governor Sanjay Malhotra indicated that alternatives such as a collateral-based benchmark may be considered.
Key Highlights:
RBI Reviewing Policy Transmission Anchor
- Current Benchmark:
- The RBI currently uses the Weighted Average Call Rate (WACR) as the operating target for monetary policy transmission.
- Potential Shift:
- The central bank is exploring whether to continue with WACR or transition to a new benchmark, such as a secured rate, based on broader market consultations.
Call Market Volumes Declining
- Deputy Governor T. Rabi Sankar noted that interbank call money market volumes have dropped significantly.
- In contrast, collateralized segments like Triparty Repo (TREPS) and Market Repo dominate overnight volumes, comprising 98% of overnight market activity.
Possible Shift to Secured Overnight Rupee Rate (SORR)
- The RBI may replace the current uncollateralised WACR with the Secured Overnight Rupee Rate (SORR).
- This shift aligns with recommendations from the Mumbai Inter-Bank Offer Rate (MIBOR) Committee.
- The move to a collateral-based benchmark would reflect the market’s transition toward secured lending instruments.
Surplus Liquidity Calibration Target
- The RBI aims to maintain a surplus liquidity level close to 1% of Net Demand and Time Liabilities (NDTL)—estimated at around ₹2.7 trillion.
- Governor Malhotra clarified that this target is flexible: “If more [liquidity] is required, we will do more. If less is required, we will do less.”
Recent Liquidity Trends
- As of Tuesday, net liquidity in the banking system stood at a surplus of ₹1.32 trillion.
- However, in December, the system experienced a liquidity deficit due to:
- Advance tax outflows
- Capital flight
- Currency leakage
Implications for the Market
- Transition to a new benchmark could affect how banks price short-term borrowing.
- It may also improve monetary policy transmission by aligning the RBI’s target with dominant, secured market segments.
- Participants are closely watching for changes that may influence interest rate structures and liquidity operations.
The RBI’s review of its liquidity management framework and potential shift from WACR to a secured rate benchmark reflects an evolving money market structure. A formal announcement is expected after stakeholder consultations conclude.
BS
