RBI evaluating liquidity framework to determine overnight anchor rate

Aim to have surplus liquidity of around 1% of NDTL

The Reserve Bank of India (RBI) is evaluating its liquidity management framework to determine whether to retain the current weighted average call rate (WACR) or explore alternative tools, said Governor Sanjay Malhotra during the post-Monetary Policy Committee press conference.

 

The WACR is an indicator for the overnight money market rate.

 

“Currently, regarding the liquidity framework, we are primarily focused on the overnight rate in the money market. We are evaluating whether it should remain the same for policy transmission purposes, or if we should target something else. We are consulting various stakeholders and will announce our decision shortly,” said Malhotra at the conference.

 

 

The central bank had a series of meetings with bankers in the run up to the monetary policy on managing liquidity.

 

T. Rabi Sankar, RBI deputy governor, said the call market volumes have significantly decreased compared to other overnight volumes.

 

He added, “As is customary for any review of a framework, the RBI will assess all the tools that are currently used, including those with different maturities and both variable and fixed rates. The central bank will evaluate these rates and determine if any changes are needed.”

 

Money market participants expect the RBI to transition from the current uncollateralised benchmark to a collateral-based benchmark. 

 

It may change the benchmark rate of overnight money market instruments from the existing interbank call money rate to the secured overnight rupee rate (SORR), which was recommended by the central bank’s Mumbai Inter-Bank Offer Rate (MIBOR) Committee.

 

Overnight rates in the collateralised segments, including triparty repo (TREPS) and market repo, remain aligned with the call rate. They continue to dominate money market activity, accounting for 98 per cent of overnight money market volume.

 

Additionally, the governor said the RBI would aim for a range near 1 per cent net demand and time liabilities (NDTL) target for surplus liquidity in the system, which is around ₹2.7 trillion.

 

However, he also clarified that if more surplus liquidity is needed, they will adjust accordingly and if less is required, they will reduce it. The primary objective is to ensure effective transmission of regulatory instruments.

 

“I would not pin myself down to 1 per cent exactly, but that is the kind of range, near about that range. If more is required, we will do more. If less is required, we will do less. The main aim, as I mentioned, is to ensure proper transmission of the regulatory instruments,” said Malhotra.

 

Net liquidity in the banking system was a surplus of ₹1.32 trillion on Tuesday, latest data showed.

 

During the second half of December, system liquidity turned into a deficit due to advance tax payments, capital outflows, and currency leakage. It has turned into surplus since the end of March following a series of liquidity infusion measures by the central bank. These include daily variable repo rate (VRR) auctions and open market operations (OMOs), dollar/rupee buy/sell swaps, and long-term VRRs. 

Decision making

 

RBI had several meetings with bankers on managing liquidity   

 

Deputy governor said the call market volumes have decreased compared to other overnight volumes 

 

Money market participants expect the RBI to transition from the current uncollateralised benchmark to a collateral-based benchmark