What does the phrase “rights in the collateral” mean?

It simply means that the grantor has enough of an interest in the collateral for the security interest transaction to arise:

For a mortgage or a charge, the grantor needs either to own or have some kind of rights in the collateral to mortgage or charge to the secured party.

For title-based security interests such as a lease, consignment or a conditional sale by retention of title, it is enough that the grantor is granted by the owner or lessor of the collateral the right to have or use the collateral.

That is why the phrase is “rights in the collateral” and not “ownership of the collateral”, because the grantor does not need to own the collateral for there to be a security interest over it.

It should be noted that a grantor need not start with rights in the collateral before they can grant a security interest. In fact, sometimes it is the other way around. Grantors start with nothing and must be granted rights to use or have collateral in title-based security interests such as leases, retention of title sales and consignments.

Where the PPSA provides that a grantor must have rights in the collateral for a security interest to attach, it means that the grantor must either have (initially) or be granted certain rights in the collateral, but need not own the collateral.

If the conditions to attachment (rights in the collateral, and value) are satisfied, then by operation of sections 19(2) and 19(5) of the PPSA the grantor is taken to have granted a security interest in the collateral. This is regardless of whether the transaction is a lease or consignment or other title-based security interest where, as a matter of strict property law, the grantor does not otherwise have any proprietary interest in the collateral beyond possession.