Ensure liquidity measures transmitted to broader market: RBI Guv to banks

RBI Governor also called banks and primary dealers for their active roles to improve liquidity and pricing for participants like cooperative banks, pension and provident funds with smaller deal sizes

Reserve Bank of India Governor Sanjay Malhotra has asked banks to ensure that the central bank’s liquidity measures are transmitted to the broader market, while raising concerns on the asymmetric rates on different market segments.

 

Stressing that the dwindling liquidity in the call money market requires attention, as the call rate is the operating target for monetary policy, Malhotra said market is also critical for the robustness of the MIBOR (Mumbai Interbank Offered Rate), the benchmark for the interest rate derivative market.  

 

“Also of concern are the asymmetries which arise on occasions between different money market rates– the rate at which RBI provides liquidity, the call money rate, the market repo rate and TREPS rate. This calls for more proactive functioning by banks – the entities with sole access to RBI’s liquidity facilities, the call money market and the repo markets – to ensure that RBI’s liquidity measures are promptly and seamlessly transmitted to the broader market,” Malhotra said in a speech of the FIMMDA-PDAI Annual conference in Bali, Indonesia on Friday. It was made public on the RBI website on Saturday.

 

The average daily volumes in the overnight money markets surged 80 per cent from about Rs 3 trillion in 2020 to over Rs 5.4 trillion in 2024.

 

He also called banks and primary dealers for their active roles to improve liquidity and pricing for participants like cooperative banks, pension and provident funds with smaller deal sizes. In the context of RBI’s retail direct scheme - a one-stop solution to facilitate investment in government securities by individual investors which was launched in November 2021- he said it is imperative to ensure that sufficient secondary market liquidity is available to such investors to be able to participate in the market at reasonable prices.

 

He also highlighted the low turnover ratio (measured as the annual turnover to outstanding stock of securities) of dated government securities which has remained modest at just over one.

 

“Liquidity continues to remain concentrated in few securities, thinning out for longer maturities,” he said, adding secondary market trading is dominated by banks and primary dealers with many large institutional investors remaining “buy and hold” investors.

 

Of the 3,000-plus institutional investors in g-secs, the top ten participants contributed a third of the overall turnover during 2024, he pointed out.

 

Malhotra also highlighted that non-resident participation has also increased in the g-sec market especially after the inclusion in global bond indices.

 

Foreigners now hold 3.2 per cent of g-secs as compared to 1.7 per cent in August 2023, ahead of the first announcement of the inclusion. Non-resident participation in the derivative markets has also been growing.

 

Recalling that banks were permitted to deal in FX beyond onshore market hours in January 2020, he said RBI has noticed that banks transacting both prior to and post onshore market hours though the volumes are not significant.

 

“Such trading, however, is largely confined to the period immediately before and after domestic FX market hours, suggesting that we are still some distance away from a true 24x5 market,” Malhotra said.

 

The average daily turnover in the forex market almost doubled from $32 billion in 2020 to $60 billion in 2024. In the non-deliverable forward (NDF), daily volumes of about $7 billion trades by domestic banks reported in recent months compared to negligible volumes on June 1, 2020, when it was first permitted.

 

Commenting on the lukewarm response to the FX-Retail platform, Malhotra said such is largely due to the reluctance of banks to offer the platform to their customers.

 

“Fair treatment of customers and transparency in forex pricing for the smaller and less sophisticated customers continues to engage our attention,” he said. 

Malhotra also highlighted that India's derivatives market is still small and lacks liquidity, especially in interest rate products. Market activity is mostly driven by banks, limiting depth and diversity. Despite efforts, key segments like interest rate futures and credit derivatives remain underdeveloped. With more loans linked to external benchmarks like the policy repo rate, there's a growing need for better risk management tools.

 

He further said that the current overnight swap market isn't suitable for this, prompting the need for new instruments like basis swaps.

 

The MIBOR committee of the RBI has recommended developing a new benchmark—Secured Overnight Rupee Rate (SORR)—which FBIL is currently working on, paving the way for SORR-based derivatives in the future.