MC Explains| All you need to know about secured overnight rupee rate

MC Explains

The Reserve Bank of India (RBI) at its December monetary policy committee review announced the introduction of the secured overnight rupee rate (SORR). This is with the aim of developing a benchmark based on secured money markets.

The new benchmark was announced after examining the recommendations of the committee as well as the feedback received from the panel on the Mumbai Interbank Offer Rate or MIBOR benchmark.

If you are aware of this development and wants to know more on this, then here is an explainer for you.

What is the proposed SORR and when would it become operational?

SORR is a benchmark based on secured money markets. It will be based on secured money market transactions in both the market repo and tri-party repo or TREP segments.

The central bank has not given any timeline for establishing the benchmark but has asked Financial Benchmarks India Limited to take the proposal forward.

What is the advantage that SORR may offer?
This benchmark will be better suited for the interest rate derivatives market because the rate will be calculated from trades executed in the basket repo and TREP components. These segments accounts for 98 percent of overnight money market volumes and include participation from other institutions such as non-banking financial companies.

In MIBOR, the rates were calculated based on the trades in the call money market or the rate at which banks borrow from and lend to each other on a daily basis. This, experts said, could be influenced by unscrupulous elements, as was revealed in the case of the global standard London Interbank Offer Rate or LIBOR, which led to the international benchmark being wound up in 2021.

SORR will be more representative of the overnight market funding rate rather than just the call money rate. Benchmarks based on these markets are also likely to be more robust and less susceptible and, hence, better suited as benchmarks for interest rate derivatives used for the purpose of hedging, the RBI said.

Will this help the interest rate derivatives market?

Experts said that the introduction of SORR is expected to lead to better price discovery in the interest rate derivatives market and bring greater transparency. SORR is also expected to improve credibility of interest rate benchmarks.

“The new benchmark is expected to be better reflective of market dynamics owing to large sample size (basket repo and TREP versus only call market earlier),” a SBI Ecowrap report said.

Can SORR replace MIBOR eventually?

The committee on the MIBOR benchmark recommended the need for transition from MIBOR-based OIS (overnight index swap) but added that it should be considered only when reasonable liquidity develops in the new interest rate derivatives (IRD).

In the interim, market participants may continue using IRDs based on both benchmarks, depending on their preference, the report said.

The committee recommended a change in MIBOR's computation methodology to include transactions based on the first three hours instead of the first hour, as it would make MIBOR more representative of the transactions in the call money market and potentially increase its reliability.

If successful over time, SORR may replace MIBOR, given that SORR may be a more accurate representative of the market rates.