Bank officials have asked RBI to use the Secured Overnight Rupee Rate (SORR) as the main rate for overnight transactions. Currently, banks are using the Weighted Average Call Rate (WACR) as overnight benchmark. Bankers want this change to be introduced in the monetary policy review meeting going to be held next week. Bankers believe that by adopting the Secured Overnight Rupee Rate (SORR), they could enhance banks financial stability and can improve liquidity management.
Bankers have also urged RBI to reduce the CRR by 50 basis points, i.e., to 3.5% from the current 4%.
Why banks Want to adopt SORR over WACR?
Both are used to manage liquidity in the banking system. Here are the few differences and its benefits between the Secured Overnight Rupee Rate (SORR) and the Weighted Average Call Rate (WACR).
– SORR is an interest rate benchmark at which banks borrow and lend in the overnight interbank market in India. Overnight interbank market is a global phenomenon, and many countries use it as a key part of their financial system. For example, €STR in the Eurozone, SONIA in the UK, and TONAR in Japan.
– SORR is considered secured as the bank that needs to borrow money has to pledge collateral (like government bonds) to back the loan. This makes it safer for the lender, as they can recover the money by selling the bonds in case of default.
– SORR, this rate reflects the real cost of money in the market, means it shows the actual price banks are paying to borrow money overnight and is based on real transactions, making it more transparent and market driven.
– As SORR is based on real transactions, it reduces the risk of manipulation.
Now coming to Weighted Average Call Rate (WACR):
– WACR is a rate at which banks borrow and lend money to each other in the overnight call money market.
– Though collateral is required in WACR but is not derived by the value of collateral. The rate here is determined by the overall liquidity condition and the interest rates at which banks are willing to lend and borrow.
– In WACR rate is influenced by the RBI’S repo rate and monetary policy.
– WACR reflects the true cost of borrowing in the market. WACR includes not just the interest rate but also the cost involved in securing those funds, like account maintenance fees. This is one of the reasons why banks are demanding SORR, as SORR reflects the actual cost more closely and is considered more accurate.
– In WACR if large banks dominate the market, they can influence the rate and can affect the borrowers, like lending more or less or changing rates strategically. It increases the risk of manipulation.