Why the RBI wishes to match the repo rate with the call money rate

In order to match the overnight call money rate and the repo rate, the Reserve Bank of India (RBI) has asked market players for their opinions. For the past few months, the RBI has been working on this. In the face of massive excess liquidity in the banking system, the overnight call rate has been trading much lower. The central bank has been working to bring it closer to the repo rate. The RBI aims to synchronize both of these rates, and this explains why. First, let's examine why the call money rate is trading lower than the repo rate. Call money rates dropped precipitously once the banking system's liquidity went positive and soared to an enormous surplus. Additionally, overnight rates were lowered as a result of the central bank's reduction in the repo rate. The Reserve Bank of India (RBI) has initiated efforts to align the overnight call money rate more closely with the repo rate to enhance the effectiveness of monetary policy transmission. This move comes in response to a prolonged period during which the call money rate—essentially the rate at which banks lend to each other overnight—has been trading significantly below the repo rate, primarily due to surplus liquidity in the banking system. When the banking system is flush with excess funds, banks have little need to borrow from the RBI at the repo rate, causing the call rate to drop. This undermines the RBI’s ability to influence short-term market rates through its policy actions. By narrowing the gap between the call rate and the repo rate, the central bank hopes to restore the repo rate’s role as the anchor for the interest rate corridor. To address the imbalance, the RBI is seeking feedback from market participants on strategies to absorb surplus liquidity more effectively. This could involve increased use of variable rate reverse repos, adjustments to the Standing Deposit Facility (SDF), or more aggressive liquidity operations. These steps are being carefully weighed to avoid disrupting financial markets while still restoring rate discipline. Ultimately, aligning the call rate with the repo rate would ensure that changes in RBI’s benchmark rates are reflected more accurately in the broader financial system, helping to control inflation and support sustainable economic growth. It also reinforces the central bank’s broader mandate of maintaining financial stability and efficient monetary operations.