Mudra Compass

In a strategic move to bolster the effectiveness of its monetary policy, the Reserve Bank of India (RBI) is taking deliberate steps to revive the interbank call money market — a critical yet shrinking segment of India’s financial ecosystem. Though largely overshadowed by secured lending avenues in recent years, the unsecured overnight borrowing market, also known as the call money market, is regaining some traction as regulators urge banks to resume active participation.

This resurgence is more than a matter of market preference; it is deeply tied to how efficiently RBI policy decisions translate into real-world lending rates. At a time when India’s broader money market is thriving with an average daily turnover of around $70 billion, the interbank call segment accounts for a mere 2% of that volume — a steep fall from about 20% a decade ago. This drop has prompted the central bank to act.

The Role of the Call Money Market

The call money market enables banks to borrow and lend funds overnight, primarily to manage liquidity shortfalls or surpluses. Unlike secured markets, which involve collateral, this is an unsecured platform, meaning transactions are based on mutual trust between banks.

Its importance lies in its close link with the RBI’s policy rate, particularly the repo rate. The weighted average call rate (WACR) — the average interest rate at which these overnight loans take place — is a key indicator for assessing liquidity conditions in the banking system. More importantly, it serves as an operational target for the RBI’s monetary stance.

According to Abhishek Upadhyay, economist at ICICI Securities Primary Dealership, despite its reduced share in overnight market volumes, the WACR remains the most effective tool for reflecting the demand-supply dynamics of bank reserves, which are directly influenced by the central bank.

Why the Market Dwindled

There are multiple reasons behind the decline of the interbank call market. After the 2008 global financial crisis, a global trend emerged that favoured secured funding over unsecured lending, due to lower associated risk. India followed suit, particularly as regulatory scrutiny and risk aversion among banks increased.

At the same time, non-bank financial players — especially mutual funds and insurance firms — have increasingly tapped into secured instruments like repos to manage their liquidity. With their asset bases swelling post-pandemic, these institutions now play a dominant role in India’s short-term funding landscape.

As a result, interbank lending in the unsecured call market has become relatively rare, which in turn has diluted the market’s role as a monetary policy transmission tool.

Signs of Revival

However, recent data shows encouraging signs. Average daily volumes in the call money market have reached ₹16,490 crore so far this month — the highest in over five years, according to Bloomberg. On May 5 alone, trading volumes spiked to ₹20,000 crore, marking the highest level since March 2020.

Sources familiar with the matter report that RBI officials have been actively engaging with dealers at major banks, urging them to increase their use of the call market. The objective is to restore its importance in the monetary system, ensuring that changes in repo rates are more swiftly and accurately reflected in lending rates across the economy.

In a further boost to the effort, an RBI-appointed committee recently recommended extending call market trading hours by two hours, potentially allowing for more flexible and timely participation.

Challenges and Costs

Despite the central bank’s push, reviving the call market isn’t without its costs. Unsecured borrowing is inherently riskier, and thus more expensive, compared to secured alternatives like repos. For banks, this could mean higher interest costs and a greater risk of counterparty defaults.

Moreover, market behaviour is driven by convenience and returns. Unless the call market becomes more liquid and efficient, banks may continue favouring safer, lower-cost funding options — especially in a world increasingly governed by Basel norms and internal risk models.

Transition to SORR and the Future of Benchmarking

Another significant development is the RBI’s introduction of the Secured Overnight Rupee Rate (SORR), which could eventually replace the Mumbai Interbank Offered Rate (MIBOR) for pricing financial derivatives. This shift mirrors international trends, such as the US moving from Libor to the Secured Overnight Financing Rate (SOFR) after the former’s credibility was compromised.

SORR is based on overnight repo trades, which now account for 98% of money market activity in India. The RBI argues that SORR is more transparent, less prone to manipulation, and more representative of actual market conditions.

Currently, about ₹100 lakh crore of outstanding interest rate derivatives in India — particularly overnight indexed swaps — are linked to MIBOR. The transition to SORR will require building adequate liquidity in SORR-linked instruments, but it marks a step toward a more modern, secure financial architecture.

Conclusion

The RBI’s renewed emphasis on the call money market signals a deeper intent to preserve the integrity of monetary policy transmission. While the market had drifted into near-obsolescence, the central bank’s intervention appears to be yielding early results. Yet, the path ahead involves navigating credit risks, operational challenges, and competitive funding options.

At the same time, the shift towards SORR as a benchmark rate reflects the RBI’s commitment to aligning India’s financial benchmarks with global best practices. Together, these measures form a broader strategy to strengthen the backbone of India’s financial system, ensuring it remains robust, transparent, and responsive to policy signals.