Dealing Room Operations
The dealing room of a bank is a place where the trading (buying and selling) of foreign currencies takes place. The treasury department of a bank is divided into the front office, middle office and back office. The dealing room is a part of the front office. The front office of a treasury division also houses separate sub-divisions for functions such as Asset Liability Management (ALM) desk, securities investment desk, etc. The separate trading/dealing desks within the front office cater to different markets.
Table of Content
- 1 Dealing Room Operations
- 2 Interbank Dealing Conversation
- 3 Exchange Position AND Cash Position
- 4 Position Keeping and Marking-to-market Process
- 5 Position Keeping and Hedging
- 6 Daylight and Overnight Limits
- 7 Daylight Limit
- 8 Overnight Limit
- 9 Fund Management by Dealers
- 10 Managing Fund Positions
- 11 Call Money and Term Money
- 12 Repo/Reverse Repo With RBI
For example, the forex desk caters to the foreign exchange needs of the bank and its customers. The dealing room is a profit centre of the bank. It serves as a centralised service branch for all the branches of a bank. It buys and sells the foreign currencies for all of them. The staff members of the dealing room of a bank comprise dealers or traders. The ‘chief dealer’ is the head of the dealing room.
The dealers/traders are under the chief dealer, and they report to him. These dealers carry out all the foreign currency operations. The main activity of the dealing room is to provide rates (card rates) for currency transactions for the retail customers called ‘merchant rates’. All foreign currency transactions (taking place at any branch or division of the bank) are reported to the dealing room.
The major functions handled by a foreign exchange dealing room are as follows:
- Buying/selling foreign currencies in the interbank forex market to meet the needs of forex transactions undertaken by any branch or division of the bank
- Managing foreign currency positions, assets and liabilities of the bank
- Managing the nostro accounts that the bank maintains with its correspondent banks abroad
- Undertaking proprietary trading and hedging activities on behalf of the bank
All the dealers are usually specialised in one or more financial markets, such as forex market, money market, securities market, etc. Within the forex market division, each dealer might be specialised in a particular currency. There may be dealers dedicated to forward markets, derivative markets, etc. Apart from forex dealers directly trading in the interbank market, there could also be specialist dealers who take care of forex business originating from major corporate relationships. Usually, a bank’s board of director forms a risk management committee.
This committee grants the responsibility of proper management and control of market risks to the dealing room. It functions as the clearing house for managing and controlling the market risks associated with various assets and liabilities of the bank. It acts as the interface between the bank and the financial market in handling this function. As stated earlier, the core activity of a forex dealing room is the purchase and sale of currencies in the interbank market (in spot and forward markets).
The forex desk of bank carries out the interbank transactions on the behalf of corporate clients or for proprietary trading purposes such as speculation and arbitraging. It may also be for hedging requirements of the trading book. The interbank forex market dealings usually take place between the dealing rooms of various banks that constitute the interbank market. Banks might also use the services of a broker-dealer when they want anonymity for the interbank dealings. Trading in FX OTC markets can be technically termed “decentralised, continuous, open bid, double-auction market”.
Here, the term “open bid” refers to the fact that banks are market makers, and when they call other banks, they need not necessarily specify their buy/sell amount. The term “double-auction” implies that banks call each other for price quotations and either bank can buy or sell, i.e., the concluding trade could be either way. The forex markets are Over-the-Counter (OTC) markets. Therefore, there is no centralised trading place or online exchange where the buying/selling of currencies takes place.
The trading takes place between the dealers of dealing desks of different banks by telephone and electronic communication networks. Earlier, most of the forex trade transactions were carried out by telephone between among banks. However, there has been advancement in technology in recent decades due to which trading through electronic platforms has become a major feature of forex market transactions of banks.
Now, the telephone conversations have been replaced by electronic trading platforms such as Reuters. The forex trade (using phone/trading platform) takes place between two known counterparties as against the ‘automatic order matching’ process, which is the normal method of trading in exchanges. The proprietary FX trading platforms developed by information networking companies such as Thomson Reuters, EBS and Bloomberg electronically link the trading desks of various banks.
Apart from these, the major international banks also have their own FX trading platforms. The electronic trading platforms allow the forex quotes to be streamed from and to various market participants (banks). It is important so that market information can be monitored online by banks that have subscribed to the services of a particular platform. The quotes are updated every second with the latest market information. When a bank subscribes to a trading platform such as Reuters Dealing 3000, it can set up various counterparties with which it would like to trade.
The quotes that are streamed through the platform include the best available quote for a given currency pair, and the best quote available to the dealing bank is based on its credit relationships with other counterparties. Apart from the features of electronic conversation and Request for Quotation (RFQ) offered by the major dealing platforms such as Reuters Dealing 3000 and EBS, these platforms also offer order matching book services that are the characteristics of online stock trading platforms.
In forex markets, banks are considered to be market makers because they maintain positions in several currencies and provide bid-ask quotes for various currency pairs.
The banks derive their profit from the bid-ask spread; it means that they purchase currencies at one price (the bid price) and sell it at a higher price (the ask price).
The spread varies at different points of time depending on the demand and supply conditions in the market. In OTC-based trading, there is no single price applicable at any point of time in the market. For example, the current stock price of any particular company is ascertained from the stock exchange quotes of NSE or BSE. There is one single price applicable at a particular point of time for a particular company’s shares due to the exchange trading nature of equity shares. However, in the case of forex trades, there is no single exchange rate applicable at a particular point of time for all banks or the entire forex market.
For example, if you enquire about the exchange rates of US dollar and Indian rupee pair (USD/INR), it is quite possible and normal that a bank might quote different rates to different counterparties at the same time based on their relationship with the counterparty. The quoted rate could still be different from the rates quoted by the dealing desk of another bank. However, due to arbitrage possibilities, the exchange rates cannot deviate much between banks. The other aspect of the interbank deals is related to the size of deals.
The minimum size of the interbank deals can be somewhere about USD 10,000,000 in international markets. In the Indian forex market, the minimum size of the deals for USD and GBP is around 2,50,000 and 2,50,000, respectively. Forex desks of different commercial banks maintain their own currency portfolio and decide the bid-ask quotes accordingly.
An usual interbank deal is concluded through the following process:
- A dealer interested in buying/selling a currency contacts the trading desk of another bank over telephone or some electronic trading platform and indicates his/her interest.
- If the interests of both banks match, they agree to trade on that particular currency based on the agreed bid-ask quote, amount of trade, value date and settlement mechanism.
- The transaction data is passed to the back office for clearing and settlement.
Interbank Dealing Conversation
The forex dealing operations take place rapidly and are noisy and stressful activities because the exchange rates keep on fluctuating every moment, and this can affect the profits of the bank. The forex trade is highly monotonous as it runs on standard terms except for the quotes. This has led to the development of forex trading jargon and short forms to denote the standard trade terms. When two forex dealers converse for trading, the conversations tend to be short, precise and full of jargons.
For example, when two dealers interact to trade on USD against INR, both of them would be well aware of the spot exchange rate. Assume that the spot rate of USD/ INR is 65.5010. The exchange rates keep changing during the day; however, changes are usually reflected in the last two decimal places, i.e., it could move from 65.5010 to 65.5090 and not from 65 to 66 or 65.50 to 65.70. Therefore, dealers usually quote only the last two decimal places of the bid or ask rates. These are usually called short figures. Also, the exchange rate up to the first two decimal places is called the big figure.
The last two decimals (small figure) are known as points or pips. Apart from this, there are several other trading jargons used by dealers. Whenever an interbank transaction is initiated, one bank makes contact with a counterparty bank. The calling bank is the market user, and it requests the spot rate quotation from the other bank. The other bank is the market maker. The actual conversation required for the trade is usually very short. Once the call is initiated, the dealer gives details to the counterparty, requests the spot rate and listens to the quoting bank’s response. If the quote is agreeable, the deal is affected as per the mutually agreed terms.
A conversation between two dealers in India (on 20th December) is shown as follows:
- Dealer 1 (Bank A to Bank B): Hi Bank B! This is Bank A here. What is the spot rate for USD/INR?
- Dealer 2 (Dealing Bank, Bank B): Hello, Bank A! Spot rate – I make to you is 66.5530 – 35 (or sixty-six fifty-five…..thirty to thirty five).
- Dealer 1 (Bank A): At 35, I buy 1 crore Indian rupee, please!
- Dealer 2 (Bank B): Ok, that’s agreed. So to confirm: value spot 20th December, dealing bank buys INR 10,000,000 at 66.5535 from Bank B.
For frequently trading banks, the settlement data could be skipped as the settlement instructions applicable for these banks will be the part of their respective back office settlement databases. For example, the information regarding the normal settlement mode of Bank A will be the part of the settlement engine database of the Bank B and vice versa. The conversation between two dealing banks might continue towards confirmation of the deal and agreement on settlement data (to confirm the trade and exchange settlement instructions) as given below:
- Dealer 1 (Bank A): Yes, all agreed, …INR by CHAPS (Clearing House Automated Payments System) direct to me…where for yours?
- Dealer 2 (Bank B): My spot dollars to my Washington Office, please. Goodbye!
- Dealer 1 (Bank A): Ok, Goodbye!
The settlement information may be skipped; however, the conversation regarding confirmation of the deal is vital in order to ensure that both parties have understood what is being transacted and also that the conversation is fully recorded on the dealing room’s recording equipment. In interbank transactions, banks set a credit limit for each other and the proposed trade takes place only when the required quantity of foreign currency is within the credit limit of a bank. As explained earlier, the forex transactions are now carried out over electronic trading platforms. Therefore, the dealing conversation (shown above) over telephone can now take place through electronic conversational mode.
Figure shows a sample screenshot of Reuters Dealing System that allows electronic conversation:
The left portion of the screenshot highlights the GBP/USD pair and provides the current bid-ask rates. The numbers 37/39 are pips. The bottom right-hand corner of the screenshot allows the dealers to establish contact with any other bank with which it has established counterparty limits. The screenshot shows an electronic conversation that requests for quote for buying 10 million euros against US dollars in the short form “EUR IN 10 PLS”. The electronic reply “31 32” refers to the EUR/USD quote in terms of pips. After a trade has been agreed upon, the electronic trading platforms can also help in posttrade processing by interfacing with the back office applications for matching and settlement.
Exchange Position AND Cash Position
As a part of the dealing room operations, the dealer has to maintain two positions – exchange position or currency position and cash position (funds position). The exchange position refers to the position of bank in terms of overbought and oversold currencies as a result of interbank transactions. In this position, the dealer is concerned with the net position (net overbought or net oversold). The exchange position is arrived at after taking into account all the interbank and merchant transactions. When a dealer has oversold or overbought positions, the dealer is exposed to the market fluctuations.
For example, if the overall position of the US dollar is long (buy), say by 10 million, on any day, the value of the position in terms of home currency (INR) depends on the exchange rate. Assuming an exchange rate of USD/INR = 65, the open position is worth INR 650 million. However, if the exchange rate changes to USD/INR = 64, the value of the position will come down by INR 10 million, which will be a direct loss for the bank.
Hence, the dealer is required to monitor and manage the exchange position with respect to the overall limits allowed as per the bank’s policy guidelines and the market movements. Cash position refers to the position of the bank in terms of receivables and payables. This position takes into account the assets and liabilities that are part of the trading book and treasury activities. For example, an investment in international money market is an asset, whereas a money market deposit is a liability.
Stated simply, the assets might pertain to investment in domestic or foreign money markets, and liabilities may involve borrowings in domestic or foreign money markets. There is a need to maintain the overall position of assets and liabilities, as there could be a mismatch between the maturity of assets and liabilities. A maturity gap between assets and liabilities could create interest rate risks in terms of overdrafts in nostro accounts or loss of interest due to idle funds. Hence, the dealer is required to properly manage the exchange funds position.
Position Keeping and Marking-to-market Process
Position keeping refers to the monitoring of positions in each currency, i.e., monitoring the net cumulative currency position from various deals. The dealers keep a systematic record of all their deals (by time order). Due to this record, dealers can easily calculate the long and short positions. Dealers also require to keep positions and ascertain the profit and loss based on marking-to-market process. In marking-to-market process, the currency is valued at any point of time using a reference spot exchange rate.
This rate can be an official exchange rate dictated by the central bank or a daily closing rate decided in-house by the bank. This reference rate should be market-based and independently obtained to avoid problems in terms of each dealer having his/her own favourable rate for valuing his/her position. Each dealer normally keeps his/her open currency position in a rough format detailing the transactions effected. This rough data includes details such as by whom or via which method transaction took place.
This data is kept by dealers for the immediate reference, irrespective of the computer-based deal input methods. The dealer/position clerk reconciles his/her rough record with the bank’s official records at frequent intervals. The dealer record contains various transactions and the rates of transactions at which they are executed along with running average rate for the position. This position will then be markedto-market to ascertain the profit/loss for the currency position.
Illustration 1: A forex dealer goes long (purchases) by USD 2 million at USD/INR 65.50. Later, the dealer purchases another USD 1 million at 65.41. When the market moves to the exchange rate of USD/INR 65.60, the dealer decides that the market has peaked and goes short by (sells) USD 5 million at 65.60. What is the average rate applicable for the dealer’s current position? If he later values his position with a market reference rate of 65.52, what is his profit/loss applicable for the position?
Solution: The weighted average rate for the dealer’s position can be calculated as follows:
The dealer has a short position of USD 2 million at the weighted average exchange rate of 65.7950. Since the market reference valuation rate is 65.52, which is less than the weighted average rate of the position, the short position implies a profit for the dealer. If the reference market rate for valuation is 65.52, the value of his position marked to market can be calculated as follows:
Marked-to-market value of position = 2,000,000 × 65.52
= INR 131,040,000
If the dealer squares off his position, he would buy back USD 2 million at 65.52, which entails a cost of INR 131,040,000. Since the value of his position is INR 131,590,000, he would get the difference of INR 5,50,000 as profit from this trading operation. In the above example, if the dealer does not realise his profit by squaring off his position, he would continue to monitor his position at the weighted average rate of 65.7950 with an unrealised gain of INR 5,50,000.
This process of marking to market is done at the end of every trading day for controlling risk exposure, and the limits will be monitored on this basis. The official profit and loss on open exchange position is also recorded on a daily basis in the account books, i.e., general ledger of the bank by marking to market at a bank-wide daily revaluation rate. By comparing the historic value of foreign currency balances held on open position with the marked-to-market rate, the resulting profit/ loss is computed and posted (as unrealised gain/loss as per accounting standards) in local currency similar to the illustration above.
As the market rate changes every day, the unrealised losses/gains passed to the bank’s profit and loss account in home currency will also change. Actual profit can be recorded as realised gain/loss only when the position is squared off. When the position is carried overnight, the dealer will revalue his currency position at the bank-wide revaluation reference rate and will continue to monitor his position at this revalued rate.
Position Keeping and Hedging
The dealer needs to constantly monitor his exchange and cash positions for any adverse movements in exchange rates and manages the risks accordingly. The hedging of open positions of the trading book can be done by the following methods:
- Hedging through outright forward contracts
- Hedging through FX swaps
- Hedging through money market operations
- Hedging with currency derivatives
The process of exchange rate risk management and hedging is discussed in detail in Chapter 9.
Daylight and Overnight Limits
As discussed above, any open currency position may give rise to exchange rate risks. An open position refers to any currency exposure that remains unhedged. In the example above, the dealer had an open position of oversold USD 2 million (and correspondingly long position on INR for ₹131.590 million). If the dealer leaves this position unhedged, he carries the risk that the exchange rate might turn adverse the next day.
It is necessary that these open positions in several currencies be monitored for acceptable market risk. The treasury front office is responsible for maintaining and managing all the forex open positions of the bank. As also discussed above, every currency position is marked to market at the revaluation reference rate and verified against policy guidelines at the end of the day. The currency positions should be within the approved limits established by the risk management division of the bank. Apart from spot exchange position, dealers would also have positions in forward markets with different maturities.
For regulatory purposes, the net open position is calculated as follows: Net open position in any currency = Net spot position (assets less liabilities including accrued income and expenditure) + Net forward position (forward assets less forward liabilities including swaps, options, futures, etc.) + Unsettled spot contracts (spot asset less spot liability positions) + Crystallised off-balance sheet liabilities The net position in various currencies in terms of a base currency, such as USD, is summed with longs on one side and shorts on the other side.
The higher of the aggregate longs and aggregate shorts is considered the open position of the bank. This is as per the current RBI regulation because there are several methods adopted by different central banks. This net open position along with open position in gold should be less than the net open position limit. This limit of the bank is first approved by the bank’s board and then ratified by RBI.
During the day, the position of a dealer keeps changing depending on the various transactions undertaken as per the client’s needs and the proprietary trading purposes. Dealers generally want to square off the trading positions by the end of the day. However, they cannot avoid keeping open positions during the course of trading day. The dealer can at least bring down the open position to the overnight limit at the end of the day. Daylight limit refers to the position limits on a currency that a dealer can carry during regular trading hours.
During the day, he/she is allowed to exceed such limit (which may exist for few hours) in order to take advantage of profitable situations. However, a bank cannot allow a dealer to hold any amount of open position during the day, irrespective of his/her ability to square off the open positions at the end of the day. Hence, it is required to put a limit, and the dealer can carry open position during the day up to this limit.
There can be a situation when the dealer is not able to square off his/ her position at the end of day. He/She is allowed to carry over his/her open position overnight to next day. However, any open position is associated with exchange rate risk. The exchange rate at which the market opens next day can incur serious losses to the dealer. Therefore, it is required that a limit be specified for the dealers. Dealers can carry over their position to the next day up to this limit. In other words, the overnight limit specifies the maximum limit for the open currency position that can be carried over to the next trading day.
In order to manage market risks associated with open positions, banks require that the dealers strictly adhere to the daylight and overnight limits. The middle office personnel monitor these limits on a real-time basis and seek explanations from dealers if there are any deviations. These limits could be currency-wise limits, consolidated intraday limits or both. The intraday daylight limits will be normally set higher than the overnight limits. The overnight limits should be calculated as per the RBI guidelines issued in this regard and should be approved by the bank’s board, followed by the RBI approval.
Fund Management by Dealers
The management of funds by dealers requires the control of certain key financial variables including currency, amount, tenor and risk. Managing each of these variables helps manage different market risks, viz. exchange rate risks, liquidity risks, interest rate risks, price risks, etc. For example, the net overbought or oversold position determines the degree of exchange rate risk. A large open position in a currency that is depreciating can lead to significant losses.
The currency positions should be managed and based on control limits and other risk measurement tools such as value at risk. The variable, amount refers to the amount of assets and liabilities, a mismatch of which can lead to liquidity risks. For example, even if the bank has sufficient assets to fund its liabilities, it may not always be possible to liquidate the assets at a reasonable price in order to pay off the liabilities.
The variable tenor refers to maturity mismatch between assets and liabilities. A maturity mismatch, also called gap, can result in pricing and interest rate risks. For example, the net currency position will be zero when a six-month forward short position is funded with a spot long position for an equal amount. The variable risk refers to other types of risks such as counterparty risks, settlement risks, price risks, etc.
Managing Fund Positions
The treasury front office creates a consolidated foreign exchange position that shows various assets and liabilities in different currencies. The report includes assets and liabilities pertaining to different currencies in terms of spot contracts, forward contracts, derivatives and ledger accounts. The report also shows the overall net short/long position for each currency.
A typical report is shown in Table:
|Assets/Purchases (amount in ‘000)
|Liabilities/Sales (amount in ‘000)
|Monetary Unit, Overnight Limit and Description
|Foreign Currency Amount
|US Dollar Equivalent of Local Currency Book Value
|Foreign Currency Amount
|US Dollar Equivalent of Local Currency Book Value
|Deutschemark ($ 3000 mn)
|Net position (short)
|Swiss franc ($ 250 mn)
|Net position (Short)
In the above table, consolidated overall exchange position for the treasury division of two currencies is shown. The deutschemark has an overall short position of DM 2,549 and the Swiss franc has an overall short position of CHF 695. The report only shows a consolidated long/short currency position. A detailed drill down report is also generated that provides details with regard to maturity pattern of the cash flows.
Table shows a typical maturity positions report for deutschemark as follows:
The above table shows the maturity gap (positive or negative) existing for each day and the cumulative position. A positive gap exists when cash inflow is greater than cash outflow for the day.
For such dates, treasury can decide on any of the following alternatives:
- Holding currency in the nostro accounts
- Investing it for short term in money markets
- Selling it for delivery (spot or forward) at the time the gap begins and to repurchase it for delivery at the time the gap ends
- Using a combination of the above alternatives
For days of negative gaps, the treasury might decide on the following:
- Borrowing currency for short term
- Purchasing (spot or forward) for delivery at the time gap begins and selling (spot or forward) for delivery at the time gap ends
- Using a combination of the above alternatives
The dealer makes the decision to close the positive/negative gap or to leave it open until a later date. This decision is determined by analysing several variables, such as limit exposure, loss potential, interest/ exchange rate forecasts, etc. The overall position is monitored and managed by the treasury department, but the day-to-day supervision of the net positions and maturity gaps is the responsibility of the forex and money market dealers.
Call Money and Term Money
Forex market operations are closely related and interlinked to money market operations. The money market operations refer to the lending and borrowing transactions of funds for a short term in domestic and foreign money markets. The operations are handled by a dedicated money market desk of the treasury front office. The call money is one of the important segments of the money market where banks lend/borrow among themselves for meeting their dayto-day operational cash requirements and regulatory reserve requirements. The maturity period of call money is one to fifteen days.
The money lent for one day is called call money and the money lent for more than one but less than fifteen days is called notice money. The major portion of the call money is of overnight tenor. The notice money is repayable after the pre-agreed period of notice. Normally, the notice period involves a very short notice, such as oneday notice. It means repayment must be made on the first available business day in required currency after receiving notice. The interest rates applicable on the call and notice money can be altered by the lender subject to appropriate period of notice before the amendment of rate becomes effective.
The interest is normally payable along with repayment of the principal. Call/notice money refers to transactions where money is lent/borrowed between banks for tenors ranging from overnight to fourteen days (in Indian money markets). The amount of call/notice money a bank can borrow is restricted by regulatory authorities. Term money is similar to call money. It refers to lending and borrowing for fixed tenor or maturity period at a pre-specified interest rate for tenors greater than fourteen days. Term money is not governed by any RBI restrictions regarding the amount of money that can be borrowed. The interest rate will be applicable for the entire fixed term of the borrowing and cannot be changed once the deal is agreed.
The maturity period can be for one day to more than one year. The short period term money can also include overnight (from today until tomorrow) and tom/next (tomorrow against the next day) short-dated contracts. Money deposits are non-negotiable, and they cannot be cancelled before the maturity date. However, repayment/cancellation can be done after imposing the required penalty. Normally, the interest is payable along with the repayment of principal. The treasury dealers from forex and securities desks can use money market operations to fund the gaps or invest excess funds profitably apart from arbitrage and hedging operations.
Repo/Reverse Repo With RBI
Repo rate and reverse repo rate are money market mechanisms that are closely linked to securities market operations. Lending/borrowing based on repo and reverse repo is collateralised short-term lending/ borrowing mechanisms as against the call money market that involves entirely unsecured lending/borrowing. In this type of lending/borrowing, banks borrow by placing some collateral securities. The collateral securities majorly include government securities and PSU bonds. Although it is a borrowing tool, the actual process is similar to selling the collateral security with an agreement to repurchase it at a future date.
Under a repo transaction, the borrower (bank) sells the securities to the lender (RBI) with an agreement to repurchase it for the same amount on a predetermined date. The interest involved is called the repo rate. Since the borrowing mechanism involves a collateral security (which is sold and purchased back), the interest rate applicable is far less than the call money borrowing and lending rates. The repo rates are market-determined but are always less than the money market lending rates. The reverse repo transaction is opposite to repo transaction.
For the lender of funds, the repo transaction is a reverse repo transaction. In this type of transaction, the lender borrows (purchases) securities by paying spot price of those securities with an agreement to sell it back at the forward pre-specified price on a pre-determined future date. However, a reverse repo is a lending transaction for the lender; hence, he/she earns interest through the applicable repo rate, and such transactions can also be carried out for borrowing securities. Repo transactions involve a spot sale and forward purchase.
The spot sale is done at the current market price of the collateralised securities. Since the securities are now held in dematerialised form, such repo and reverse repo transactions involve change in ownership in the depository by the transfer of securities from the borrower to the lender. It means that despite the transaction being a borrowing transaction, there is actual legal transfer of ownership of securities that differentiates it as a sale transaction rather than collateral-based lending. The lender receives the coupon interest payments that have accrued on the collateral securities during the intervening period.
The repo/reverse repo transactions are also carried out by RBI for easing liquidity situation in the money markets. The banks can borrow funds from RBI through repo transactions. This equivalent reverse repo transaction for RBI is also termed the Liquidity Adjustment Facility (LAF). The repo rate at which RBI lends funds to banks is an important monetary policy tool set by RBI. Repo rate influences all other interest rates applicable in money markets and banking system as a whole. RBI frequently changes the repo rate and announces the same periodically depending on its monetary policy objectives.