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Informist, Friday, Apr. 18, 2025

 

MUMBAI - The Reserve Bank of India aims to develop a risk-free term-money market structure, and wants to create a deeper foreign exchange market that operates 24 hours a day for five days a week, Governor Sanjay Malhotra said Friday, according to officials attending the annual Fixed Income Money Market and Derivatives Association of India-Primary Dealers Association of India conference at Bali in Indonesia

 

At the conference, the governor also underlined the need for greater involvement of individual investors, and pushed for customised financial instruments to suit the diverse needs of market participants. Citing the report of the Committee to Review the MIBOR benchmark, he batted for two overnight benchmark rates: one used to take a view on the future movements of the policy base and the other used by the real sector to hedge its risk.

 

The governor said that despite the central bank's efforts to develop a term-money market through measures such as the main 14-day variable rate repo and reverse repo operations under its liquidity management framework since 2020, as well as longer-term operations, demand for such instruments is muted. He said that a risk-free term structure is needed to price interest-rate products such as loans, instead of using Treasury bills or money market yield curve as the base.

 

Moreover, the volumes in the interest rate derivatives market in India are growing, but the market was still dominated by banks and not getting deeper with wider participation, Malhotra said. Money market products currently are all linked to overnight benchmarks which are not able to forecast the long-term views of the market. These products were even more important amid the macroeconomic uncertainties currently prevailing, he said.

 

This depth is important to ensure a robust price discovery in the Mumbai Interbank Offer Rate, which is the current benchmark for the interest rate derivatives market, the governor said. Malhotra also pointed to the FIMMDA's ongoing work on creating the Secured Overnight Rupee Rate, given the go-ahead by the RBI in December, as a benchmark for the collateralised money market, considering the dwindling volumes in the uncollateralised and interbank call money market.

 

The RBI governor also called for aligning market-determined overnight borrowing rates, including the call money rate, the triparty repo rate and the central bank's repurchase rate at which banks borrow from the RBI. This is part of the RBI's endeavour to enhance the transmission of monetary policy, the governor said.

 

FOREX, BOND MARKET

Malhotra also pointed to the need to deepen the foreign exchange market onshore, as well as bring more transactions to common electronic trading platforms. Referring to the RBI's move to permit extending quotes and trading outside of domestic market hours in 2020, the governor said trade was confined to the period immediately before and after domestic market hours: currently 0900 IST-1530 IST. The central bank instituted a committee in February to review market timings, and it has a deadline to submit its views by end-April.

 

"We would like it (the foreign exchange market) to really effectively become not 24X7, but at least 24X5," the governor said, according to the officials at the meeting.  

 

The foreign exchange market is reasonably liquid with a narrow spread between the bid and ask price, the governor said. Increasing transparency in the market was also a positive, the governor said. However, the banking regulator said that even as authorised trading platforms are available for forward transactions in this market, there appears to be a preference for such trades to take place bilaterally. The central bank would like an increasing share of forward trades in the foreign exchange market on electronic trading platforms to ensure better price discovery and efficiency, Malhotra said. 

 

As for the government bond market, Malhotra commented on the strength of the market and underlined the reduction of the government's borrowing programme with the cost of borrowing easing to 6.96% in 2024-25 (Apr-Mar), from 7.24% the previous financial year. The increased participation from overseas investors after the inclusion of Indian gilts in the global bond indices further deepened the gilt market, Malhotra said. At the end of FY25, foreign portfolio investors held 3.4% of Indian government bonds, doubling on year, he said. Clearing Corp. of India data for Thursday shows FPIs hold INR 2.97 trillion of index-eligible gilts, which have no cap on foreign investment.

 

Despite the government securities market being the most liquid market, the turnover ratio in the market has been limited to merely 1% of the total outstanding bonds. The ratio further declines when the less-liquid state government securities are included, Malhotra said.

 

The governor also focused on the need to include more retail participation in the foreign exchange and government securities markets, which are predominantly dominated by banks and primary dealerships. He said the top 10 participants contribute to a third of the total turnover, against more than 3,000 institutional investors in the market.

 

To promote more retail participation, the central bank in November 2021 launched the RBI retail direct facility where individual investors can make an account and directly invest in government securities and sovereign gold bonds. The RBI has also extended the initiative of retail inclusion to the foreign exchange market and announced that FX retail will be accessed through the Bharat Connect platform. The participation in these retail platforms has room to grow and banks could work towards popularising these products amongst individual investors, Malhotra said.

 

Reported by Cassandra Carvalho and Vidhushi RajPurohit

Edited by Vandana Hingorani

 

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