India’s Call Money Market Faces Liquidity Risks

MUMBAI (Reuters) – India’s call money market is encountering liquidity challenges, posing hurdles for monetary policy transmission, as highlighted by the Reserve Bank of India (RBI) chief in a Saturday speech.

Concerns from the RBI Governor

Reserve Bank of India (RBI) Governor Sanjay Malhotra raised concerns regarding “asymmetries between various money market rates” – particularly the rate at which the RBI provides liquidity, the call money rate, the market repo rate, and the TREPS (tri-party repo dealing system) rate.

Importance of Proactive Banks

Banks, which have exclusive access to the RBI’s liquidity facilities, the call money market, and the repo markets, must act proactively to ensure that the central bank’s liquidity measures are transmitted “promptly and seamlessly” to the broader market, according to Malhotra’s remarks during a conference in India that were later published on the RBI website.

Role of Call Money Rate

The call money rate is the overnight interest rate at which banks and financial institutions lend to one another. When the RBI reduces interest rates or injects liquidity, it typically lowers the call money rate, effectively transmitting the central bank’s policy moves throughout the monetary system.

Current Liquidity Situation

This month, surplus liquidity in India has averaged 1.7 trillion rupees ($20 billion) per day, reversing a four-month deficit as the RBI has increased liquidity support to foster economic growth.

Recommendations for Improvement

The governor also emphasized the necessity for enhancing the government securities market in India by improving liquidity and pricing through broader stakeholder participation. Furthermore, he underscored the requirement for more proactive risk management in the derivatives market, which would enhance depth, diversify perspectives, and promote greater competition and efficiency.

($1 = 85.4290 Indian rupees)