The governor of India’s central bank has highlighted concerns over liquidity challenges within the call money market, which could hinder monetary policy transmission. Sanjay Malhotra emphasized asymmetries between various money market rates and urged banks to ensure effective transmission of RBI liquidity measures. Furthermore, he called for enhancing India's government securities market and improving risk management in derivatives markets.

Risk Asymmetry in Money Market Rates

Central bank governor Sanjay Malhotra pointed out discrepancies among different money market rates, such as those provided by the RBI, the call money rate, the repo rate, and the tri-party repo dealing system rate. He stressed that these inconsistencies pose risks to liquidity and monetary policy effectiveness. Banks, which are uniquely positioned to access RBI liquidity facilities, play a crucial role in ensuring seamless transmission of liquidity across broader financial markets.

In India, the call money rate serves as an overnight interest benchmark for lending and borrowing activities among banks and financial institutions. When the RBI adjusts its policies, such as cutting interest rates or injecting liquidity, it directly impacts the call money rate. This mechanism is vital for transmitting policy changes throughout the financial system. However, occasional mismatches in rates can impede this process. To address this, Malhotra urged banks to be proactive in facilitating prompt and efficient transmission of liquidity measures.

Enhancing Financial Market Efficiency

Beyond addressing liquidity risks, Malhotra advocated for strengthening the Indian government securities market. He proposed increasing participation from diverse stakeholders to improve liquidity and pricing mechanisms. Additionally, he emphasized the need for more active risk management practices in the derivatives market to enhance market depth and foster competition and efficiency.

Malhotra highlighted that surplus liquidity in India has averaged 1.7 trillion rupees daily this month, reversing a four-month deficit due to RBI's intensified efforts to support economic growth. Deepening the government securities market involves attracting a wider range of participants, thereby enriching market perspectives and promoting competitive dynamics. Moreover, proactive risk management in derivatives trading can lead to greater diversity of opinions and improved operational efficiency. These initiatives collectively aim to fortify the resilience and functionality of India’s financial ecosystem.