Business
Indian Banks Urge RBI to Adopt Fixed-Rate Liquidity Tool, Propose New Benchmark SORR
Here’s a clear explanation of the RBI liquidity management story from April 5, 2025:
What’s Happening?
Indian banks have proposed a major change in how the Reserve Bank of India (RBI) manages short-term liquidity in the financial system. They are recommending:
- Shifting to an overnight fixed-rate liquidity tool
- Adopting a new benchmark called SORR (Secured Overnight Rupee Rate)
Why This Matters
1. Current System
- The RBI currently uses a mix of tools like Variable Rate Reverse Repo (VRRR) and Standing Deposit Facility (SDF) to manage liquidity.
- These tools decide how much money is in the system and at what cost banks can borrow or park funds.
2. Proposed Change
- Banks want a simpler, more predictable system.
- By shifting to an overnight fixed-rate tool, banks can manage their day-to-day cash needs more easily and efficiently.
3. SORR – A New Benchmark
- SORR would replace or complement the MIBOR (Mumbai Interbank Offered Rate), which is currently used as a benchmark for overnight lending.
- SORR is based on actual secured overnight lending transactions — making it more reflective of real market conditions.
Why Banks Want This
- With interest rates expected to remain low or fall, banks prefer more stable and flexible liquidity access.
- The current VRRR mechanism is seen as too rigid and complex, especially during periods of market volatility.
What It Could Mean for You
- If adopted, this could:
- Make loan pricing more accurate and responsive
- Improve liquidity for banks, helping them lend more
- Create a more transparent interest rate environment