RBI likely to use 'secured rate' as new operative benchmark tool

Synopsis

Nomura suggests the RBI might replace the unsecured WACR with a secured rate like TREPS or SORR to enhance monetary policy transmission, aligning with global practices. Secured repo markets have grown significantly, while call money market volumes remain stagnant. This shift would necessitate more active liquidity management by the RBI, especially concerning mutual funds' access to standing facilities.

Mumbai: The Reserve Bank of India may consider replacing the unsecured weighted average call rate (WACR) with a secured rate-such as the tri-party repo dealing system (TREPS) rate or the newly introduced secured overnight rupee rate (SORR)-as the operational rate for effective monetary policy transmission, suggested Japanese brokerage firm Nomura.

This shift would better reflect short-term funding conditions and align India's framework with global best practices, it said in a report.

While the call money market has seen stagnant volumes of around ₹12,000 crore daily, the secured repo markets have grown substantially. TREPS, for instance, now handles an average volume of ₹3-4 lakh crore in daily transactions. Nomura argues that a secured rate would better represent short-term funding conditions.

It also notes that such a shift would require more active liquidity management by the RBI, especially since mutual funds-major lenders in secured markets-do not have access to the RBI's standing facilities.

This note comes at a time when the RBI is reviewing its liquidity management framework, which was rolled out in February 2020.

The RBI's Monetary Policy Committee sets the policy repo rate, currently at 5.50%, but it is the central bank's liquidity management team that ensures the operative rate remains aligned with it. Nomura believes that moving to a secured rate would improve the transmission of policy changes to the broader economy.

"A shift towards a secured rate would be a more accurate reflection of short-term funding conditions, given wider participation, and should improve policy transmission," it said in a note.

It does not expect RBI to set a fixed quantitative liquidity target, such as ±1% of net demand and time liabilities (NDTL), due to the difficulty in forecasting daily liquidity.

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