MUMBAI, June 16, 2025 – In a significant move to strengthen monetary policy transmission, the Reserve Bank of India (RBI) has reached out to major market participants to gather feedback on aligning the overnight interbank call money rate more closely with the central bank’s policy repo rate. This step comes amid a visible divergence between the two rates, which could potentially disrupt liquidity management and the overall monetary transmission mechanism.
Why Is RBI Focusing on the Overnight Call Rate?
According to five senior treasury officials, the RBI initiated this consultation process after Reuters reported last week that the central bank is keen to bring the overnight call rate in closer alignment with the policy repo rate.
Currently:
- Policy Repo Rate: 5.50%
- Average Overnight Call Rate: 5.30%
- TREPS Rate (Tri-party Repo): ~5.20%
Since April 2025, these operative rates have been consistently below the policy rate, indicating that banks have been able to access cheaper funds than the RBI intends. This misalignment can undermine the effectiveness of monetary policy and send mixed signals to the financial markets.
The Growing Yield Concern
Apart from the call rate deviation, the RBI has also taken note of the unexpected surge in treasury bill (T-bill) yields, especially for 364-day notes, during auctions last week. Higher yields reflect market anticipation of tighter liquidity or increased government borrowing, prompting the RBI to keep a close watch on short-term funding markets.
Will RBI Conduct VRRR Auctions?
One of the most probable outcomes of these discussions is the launch of Variable Rate Reverse Repo (VRRR) auctions, aimed at absorbing surplus liquidity from the system.
A senior official from a leading state-run bank said, “The motive seemed to be to sensitise the market that a variable rate reverse repo auction would be in the offing.”
If conducted, VRRR auctions will enable the RBI to mop up excess liquidity, thereby nudging short-term rates closer to the policy rate and curbing volatility.
Recent Monetary Policy Moves by RBI
- Policy Rate Cut: On June 6, the RBI slashed its key policy rate by 50 basis points, bringing it down to 5.50%.
- Cash Reserve Ratio (CRR): Announced a reduction by 100 basis points starting September 2025 to support long-term liquidity.
- Variable Rate Repo Halted: Since June 11, the RBI has stopped its daily variable rate repo auctions, hinting that the focus might soon shift to liquidity absorption via VRRR.
This policy approach indicates that the RBI is attempting to gradually normalize liquidity without causing sudden shocks to the financial system.
What Market Experts Are Saying
Experts emphasize the importance of maintaining a gradual and predictable shift toward tighter liquidity conditions.
Gaura Sen Gupta, Chief Economist at IDFC First Bank, stated, “Given that the focus of monetary policy is on enhancing transmission, the expectation channel is equally important. It would be better to move overnight rates towards the repo rate gradually, allowing monetary transmission to gain momentum.”
Treasury officials, too, have urged the RBI to avoid abrupt liquidity tightening to prevent unnecessary volatility in the short-term money market.
Why Does This Matter for Banks and Borrowers?
- Improved Monetary Transmission: Closer alignment between the call money rate and repo rate ensures that interest rate changes by the RBI are reflected quickly in bank lending and deposit rates.
- Liquidity Stability: VRRR auctions could provide the RBI with a tool to finely tune liquidity, avoiding excess funds chasing limited borrowing opportunities.
- Impact on Borrowing Costs: Gradual tightening would lead to slightly higher short-term borrowing costs for banks, possibly pushing up rates on loans and credit.
Israel-Iran conflict LIVE: Iranian strikes cause minor damage to U.S. embassy building in Tel Aviv
[…] RBI Plans Liquidity Adjustment: Market Feedback Sought on Aligning Call Rate with Repo […]