Overnight Rate refers to the interest rate at which banks and financial institutions lend funds to one another for a single night. It plays a crucial role in the monetary policy framework of a country, influencing short-term borrowing costs, liquidity, and overall economic stability. In India, this rate is closely linked to the Reserve Bank of Indiaís (RBI) repo rate and reverse repo rate, which guide liquidity management in the banking system.

The overnight rate serves as a benchmark for various short-term money market instruments such as call money, notice money, and term money. When liquidity in the system is tight, this rate tends to rise as banks compete for funds. Conversely, during periods of surplus liquidity, the rate usually declines. The RBI monitors this rate to ensure stability and efficient transmission of its monetary policy objectives.

In the Indian context, the Weighted Average Call Rate (WACR) is the operating target of monetary policy, reflecting the average rate at which overnight funds are traded in the interbank market. A significant deviation of the WACR from the policy rate can signal either liquidity shortages or excesses, prompting the RBI to intervene through open market operations or repo auctions.

For investors and market participants, understanding the overnight rate is essential as it influences yields on short-term debt instruments like Treasury Bills, Certificates of Deposit, and Commercial Papers. Changes in this rate can also impact borrowing costs, corporate financing decisions, and equity market valuations. Thus, the overnight rate acts as a key indicator of the prevailing monetary environment and helps gauge the direction of interest rates in the broader economy.