RBI pushes lenders to revive funding market vital for monetary policy

A dwindling borrowing market used mainly by Indian banks is showing signs of life as authorities champion its usage to lenders, according to people familiar with the matter.
Average daily volumes in the interbank call market have climbed to their highest in about five years this month, despite a plethora of often more attractive alternatives. Officials at the Reserve Bank of India have been asking dealers at banks to use the facility to keep its relevance to monetary policy alive, the people said, who asked not to be named, citing private discussions.
While overall money-market turnover has risen to an average $70 billion a day, interbank trades account for just 2 per cent of that, down from 20 per cent a decade ago. That's as non-bank players like mutual funds and insurers use other venues for funding, contributing to the market's waning significance.
The call money market is a vital component of India's financial plumbing, allowing the central bank to gauge how well its interest rate changes are being reflected in the broader economy. Shrinking volumes threaten to disrupt this process, weakening the link between policy rates and real-world borrowing costs, and by extension, the pricing of key financial derivatives.
'The weighted average call rate is the best operational target for monetary policy, despite dwindled share of call market volumes in overnight markets,' said Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership. 'It represents the balance between demand and supply of bank reserves that is controlled by the RBI.'
An email sent to the RBI seeking comment on the matter wasn't immediately answered.
Daily average volumes in the call market are about Rs 16,490 crore ($1.9 billion) so far this month, Bloomberg-compiled data show. That's the highest in more than five years. Volumes reached 200 billion rupees on May 5, the highest since March 2020.
To be sure, reviving the market comes at a cost: unsecured borrowing is typically more expensive and exposes lenders to credit risk.
The trend away from the bank-to-bank call market isn't unique to India. Since the 2008 financial crisis and the stricter banking rules that followed, several countries embraced secured markets. For instance, the US replaced the scandal-hit Libor with the Secured Overnight Financing Rate.
In India, the transition comes as players like mutual funds and insurers — whose assets have ballooned since the pandemic — are borrowing in the secured funding markets such as repo. The waning impact of the interbank rate has reduced the effectiveness of its link to the policy rate, making it harder to price loans and other financial products.
This has spurred the central bank to push for a new benchmark — the Secured Overnight Rupee Rate (SORR) — which may eventually replace the Mumbai Interbank Outright Rate for pricing derivatives. The transition will depend on liquidity building up in the products tied to the new rate, according to the RBI.
About 86 per cent of India's Rs 100 trillion outstanding in interest interest rate derivatives are overnight indexed swaps, tied to MIBOR, according to the central bank. The SORR, based on secured overnight repo trades that account for 98 per cent of activity, offers greater reliability and transparency.

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