RBI to introduce new benchmark SORR based on secured money markets

The Reserve Bank of India (RBI) has proposed to introduce a new benchmark for the interest rate derivatives market based on secured money markets.

 

Based on the recommendations of the Mumbai Inter-Bank Offer Rate (MIBOR) Committee and the feedback received, and aligned with current market dynamics, the RBI has proposed to establish a benchmark derived from secured money markets, encompassing both basket repo and triparty repo (TREP), central bank governor Shaktikanta Das said on Friday.

 

This benchmark, to be known as Secured Overnight Rupee Rate (SORR), will be developed with the support of Financial Benchmarks India Limited (FBIL), which has been requested to take the proposal forward.

 

Market participants said that the introduction of SORR is expected to enhance transparency in benchmark-setting. Unlike the existing MIBOR, which is a polled rate derived by collecting data from participants and averaging the responses after excluding outliers, SORR will be trade-based. This means it will rely on actual transactions in secured money markets, making it more resistant to manipulation and reflective of real market dynamics. While the shift is significant in terms of methodology, it is not expected to have an immediate market impact. Instead, it marks a step towards adopting global best practices, such as alignment with Secured Overnight Financing Rate (SOFR).

 

“It will bring more transparency. It does not have a market impact, but it is a step towards moving to a more transparent benchmark-setting, like this is where the exact trades are happening, so you know they cannot be fudged,” said Vijay Sharma, senior executive vice-president at PNB Gilts.

 

SOFR is a benchmark interest rate that reflects the cost of overnight borrowing, collateralised by US Treasury securities. It was introduced as an alternative to London Interbank Offered Rate (LIBOR), which had long been used globally across multiple currencies and financial contracts.

 

“This is basically bringing alignment with international standards and TREP is liquid, which will give better idea,” said a money market dealer at a state-owned bank.

 

The RBI’s MIBOR Committee, in a report published on October 1, suggested that FBIL may develop and publish a benchmark based on the secured money market. Stakeholders and the public were invited by the RBI to submit comments on the panel’s report via email by November 15. Fixed Income Money Market and Derivatives Association of India (FIMMDA) had recently held a call with bankers to discuss the same.

 

Market for repo in government securities (TREPS and market repo), which accounts for 98 per cent of overnight money markets and includes both banks and non-banks, is a more representative and robust measure of overnight market funding rates compared to the call money market. This makes it better suited as a benchmark for interest rate derivatives used for hedging, the MIBOR committee had stated in the report. However, the committee also acknowledged that a benchmark based on call money rates, which is the target of monetary policy operations, may be preferred for derivatives aimed at speculating on monetary policy actions.

 

The report also suggested that non-residents may be granted gradual access to onshore Interest Rate Derivative (IRD) markets beyond MIBOR Overnight Indexed Swaps (OIS) for purposes other than hedging.