The Reserve Bank of India has decided to float a new interest rate benchmark — the Secured Overnight Rupee Rate (SORR) — in line with the increasing importance of the collateralised money markets.
The move is expected to improve the credibility of the interest rate benchmark setting. SORR will replace the Mumbai Interbank Outright Rate (MIBOR), which has been in vogue since 1998.
The new benchmark will be based on the secured money markets (both basket repo and triparty repo (TREP) to reflect the importance of collateralised markets. It will be computed from trades in the first three hours of the basket repo and the TREP segments, instead of the one hour computation of call money rates.
The central bank has directed the Financial Benchmarks India Limited to take the proposal forward.
The global money market has gone through a structural change with the collateralised money markets gaining importance and with the abolition of London interbank offered rate (Libor). Once the global benchmark, Libor was last published on September 30.
This was replaced by benchmarks such as the Secured Overnight Financing Rate (SOFR) in the United States, Swiss Average Rate Overnight (SARON) in Switzerland, among others.
“SORR is a much needed benchmark as it incorporates both regulatory rates and market sentiments,” said Pralay Mondal, managing director, CSB Bank.
The RBI decision was based on the recommendations of the committee on Mumbai Interbank Outright Rate (MIBOR) benchmark which reviewed the interest rate benchmarks in India with a special focus on the MIBOR.
The committee, headed by RBI executive director Ramanathan Subramanian, was of the opinion that the market for repo in government securities (TREPS and market repo) accounts for 98% of the overnight money markets with participation from both banks and non-banks and therefore would be more representative of the overnight market funding rate than call money market.
Benchmarks based on these markets are also likely to be more robust and less susceptible and hence best suited as benchmarks for interest rate derivatives used for the purpose of hedging, the committee said.
