Mumbai: The Reserve Bank of India (RBI) on Thursday proposed allowing a wider set of market participants, including non-banking financial companies (NBFCs), housing finance companies (HFCs), All India Financial Institutions (AIFIs) and companies, to access the term money market, which currently remains largely restricted to banks and standalone primary dealers.
This move is aimed at deepening liquidity and strengthening the transmission of monetary policy across different interest-rate tenors, the central bank said in a release.
RBI has invited comments from stakeholders and market participants on the draft directions by 25 July.
At present, only banks and standalone primary dealers are permitted to participate in the term money market, subject to prudential limits.
Under the draft framework, AIFIs and NBFCs, including HFCs but excluding base-layer NBFCs, will be allowed to both borrow and lend in the term money market. Companies will be permitted to participate as lenders.
Move could broaden pool
Market participants believe the move could significantly broaden the pool of lenders and borrowers in the unsecured money market, helping improve price discovery and liquidity in maturities beyond overnight borrowing.
RBI also proposed easing borrowing limits for standalone primary dealers (PDs). Under the draft norms, standalone PDs can borrow up to 400% of their net owned funds through term money and inter-corporate deposits combined. Their borrowing limit in call and notice money markets will remain at 225% of net owned funds on a fortnightly average basis.
For NBFCs and HFCs, the proposed borrowing cap in the term money market has been fixed at 200% of net owned funds. AIFIs will be governed by board-approved limits within existing regulatory exposure norms.
According to RBI, participants would remain free to negotiate interest rates, while transactions could be executed either over-the-counter or on authorised electronic trading platforms. Market hours have been proposed from 9 am to 7 pm on business days or as specified by RBI from time to time. Currently, call and money market timings are from 9 am to 5 pm.
The draft guidelines also seek to strengthen market transparency and reporting standards, with all call, notice, and term money transactions executed outside the RBI-operated NDS-CALL platform required to be reported to the platform within 15 minutes of execution.
Membership required
Eligible participants who are not currently members of NDS-CALL will be required to obtain membership within six months of the directions coming into force.
Further, any cancellation or early termination of transactions will also have to be reported within 15 minutes. The RBI has proposed that misreporting or duplicate reporting of deals be immediately brought to the notice of both the NDS-CALL operator and the central bank.
The draft framework retains the existing structure of the call and notice money markets.
Scheduled commercial banks, small finance banks, regional rural banks, co-operative banks and standalone PDs will continue to participate as both borrowers and lenders. Payments banks can continue to borrow and lend in call and notice money markets, while being allowed to participate in the term money market only as borrowers.
The proposal follows the RBI’s announcement in its last monetary policy on 8 April, when governor Sanjay Malhotra had highlighted the need to develop a more active term money market.
“An active-term money market, apart from providing an alternative funding avenue to the market participants, also helps in enhancing monetary policy transmission by creating a link between the overnight money market and longer-term interest rates,” the RBI had said in its April policy statement.
