Mumbai: The Reserve Bank of India (RBI) governor, Sanjay Malhotra, Friday underscored the risks of dwindling liquidity in the call money market, a situation that could compromise transmission efficiency and prevent the economy from extracting optimal benefits through the current cycle of policy rate reductions.
Asymmetries among the call money rate, the market repo rate and TREPS rate are also major concerns, and banks must take a proactive approach, the governor said at the 24th FIMMDA-PDAI Annual Conference in Bali on Friday.
"The occasional asymmetries call 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.
He also underscored the need to develop the short-run, risk-free term structure, especially in the three-day to three-month segment, that would act as the benchmark for pricing of interest rate products, including loans.
Additionally, commenting on the swap market, which is based on an overnight rate, the governor said that it may not be best suited to hedge exposures. Especially since this segment is also used to express views on expected monetary policy movements.
Most developed countries have at least two major benchmarks - one used to take a view on the future movements of the policy rate and another used by the real sector to hedge risks.
"At least, a market for basis swap instruments needs to be developed to manage the associated basis risks...going forward, derivatives based on the Secured Overnight Rupee Rate (SORR) will also need to be developed," governor Malhotra said.
On the financial markets, governor Malhotra said all segments, including forex, government securities, and money markets, have largely remained stable. Even as the rupee faced some pressure earlier, it has since recovered and despite equity markets witnessing corrections due to capital outflows, the government securities market remained strong through FY25.
Asymmetries among the call money rate, the market repo rate and TREPS rate are also major concerns, and banks must take a proactive approach, the governor said at the 24th FIMMDA-PDAI Annual Conference in Bali on Friday.
"The occasional asymmetries call 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.
He also underscored the need to develop the short-run, risk-free term structure, especially in the three-day to three-month segment, that would act as the benchmark for pricing of interest rate products, including loans.
Additionally, commenting on the swap market, which is based on an overnight rate, the governor said that it may not be best suited to hedge exposures. Especially since this segment is also used to express views on expected monetary policy movements.
Most developed countries have at least two major benchmarks - one used to take a view on the future movements of the policy rate and another used by the real sector to hedge risks.
"At least, a market for basis swap instruments needs to be developed to manage the associated basis risks...going forward, derivatives based on the Secured Overnight Rupee Rate (SORR) will also need to be developed," governor Malhotra said.
On the financial markets, governor Malhotra said all segments, including forex, government securities, and money markets, have largely remained stable. Even as the rupee faced some pressure earlier, it has since recovered and despite equity markets witnessing corrections due to capital outflows, the government securities market remained strong through FY25.
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