Context:
The Reserve Bank of India (RBI) is reportedly preparing to shift its operational benchmark for monetary policy transmission from the unsecured Weighted Average Call Rate (WACR) to a secured overnight rate, such as TREPS or the newly introduced Secured Overnight Rupee Rate (SORR).
Key Highlights:
- Reason for Shift:
- The secured rates (TREPS/SORR) represent over 98% of overnight market volumes, offering a more robust and transparent benchmark than WACR, which is based on a smaller share of unsecured interbank trades.
- Liquidity Management Proposal:
- Banks have urged RBI to replace the current 14-day variable rate reverse repo (VRRR) auctions with a fixed-rate daily repo to better handle 24×7 banking and fluctuating liquidity.
- The move is expected to improve RBI’s ability to anchor short-term interest rates more effectively.
- Support Measures Being Considered:
- A possible 100 bps cut in CRR (Cash Reserve Ratio) effective from September 2025 to infuse durable liquidity.
- Integration of digital systems and operational tweaks to facilitate smoother monetary policy implementation.
Impact
- Improved policy transmission to money markets and commercial banks.
- Greater stability in short-term rates.
- Strengthening of monetary policy credibility and global integration of India’s financial markets.
