RBI Notifications

Secured Overnight Financing Rate (SOFR)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : SOFR and various inter-bank rates

Mains level : Not Much

State Bank of India (SBI) has executed two inter-bank short term money market deals with pricing linked to SOFR (Secured Overnight Financing Rate).

Try this PYQ:

Q.The money multiplier in an economy increases with which one of the following?

(a) Increase in the cash reserve ratio

(b) Increase in the banking habit of the population

(c) Increase in the statutory liquidity ratio

(d) Increase in the population of the country

What is SOFR?

  • Secured Overnight Financing Rate (SOFR) is a secured interbank overnight interest rate.
  • It is a replacement for USD LIBOR (London Inter-bank Offered Rate) that may be phased out end-2021.
  • The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market.

Why SOFR?

  • Global regulators decided to move away from the Libor, a vital part of the financial system after it was revealed in 2012 that banks around the world manipulated it.
  • It also didn’t help that volume underlying the benchmark dried up.
  • U.K regulators set the deadline at 2021 for financial firms and investors to transition away from the Libor.

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