India’s central bank, the Reserve Bank of India (RBI), will hold a meeting with lenders next week to discuss possible changes in how it manages money in the financial system. People familiar with the matter said this step is part of the RBI’s efforts to ensure its decisions on interest rates have the desired effect on the wider economy.
According to The Economic Times, the meeting is scheduled for May 21 and will include senior RBI officials, such as the newly appointed Deputy Governor Poonam Gupta.
Focus on Improving Market Rate Alignment
This discussion comes just before the RBI’s policy announcement on June 6 and follows the bank’s recent actions to shift the system from a large cash shortage to a surplus. One key topic is likely to be the overnight weighted average call rate, which is the interest rate banks charge each other for short-term loans.
The RBI wants this rate to stay close to its policy rate so that borrowing costs in the market reflect its monetary decisions. However, this link has often been broken in recent years.
New Benchmark and Repo Operations Under Review
The RBI has proposed a new benchmark called the Secured Overnight Rupee Rate (SOR), which might replace the current Mumbai Interbank Outright Rate (MIBOR) used for setting interest rates on financial contracts. The bank may also consider whether to use fixed-rate or variable-rate repurchase operations (repos) to keep market rates aligned with policy rates. The RBI had stopped daily fixed-rate cash windows in 2020.
Additionally, the meeting might review changes to how much money banks must keep daily as cash reserves. Currently, banks are required to hold 90% of their mandated cash reserves each day.
The RBI did not respond to ET’s email request for comment.