RBI Considers Shift from Call Rate to Collateral-Based Benchmark in Liquidity Framework

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