RBI Governor Urges Banks To Improve Liquidity Transmission And Address Market Disparities
Reserve Bank of India (RBI) Governor Sanjay Malhotra has urged banks to enhance the transmission of the central bank’s liquidity operations to the broader financial system. He also expressed concern over persistent discrepancies among various short-term interest rates in the money market.
Speaking at the FIMMDA-PDAI Annual Conference in Bali, Indonesia, Malhotra highlighted the importance of the call money market, noting that its shrinking liquidity demands attention. As the primary operating target of the RBI’s monetary policy, the health of this market directly influences the Mumbai Interbank Offered Rate (MIBOR), a crucial benchmark for the interest rate derivatives segment, according to a Business Standard report.
He pointed out inconsistencies among key rates, such as the RBI’s liquidity rate, the call money rate, the market repo rate, and the TREPS rate. These disparities, he said, underscore the need for banks—who have exclusive access to the RBI’s liquidity and money markets—to act more decisively in ensuring seamless transmission of policy actions.
Malhotra noted a significant rise in overnight money market activity, with average daily volumes jumping from Rs 3 trillion in 2020 to over Rs 5.4 trillion in 2024.
Support For Smaller Market Participants
In his address, he also encouraged banks and primary dealers to do more to support smaller market participants, such as cooperative banks, pension funds, and provident funds, by enhancing liquidity and improving pricing. He stressed the importance of providing adequate secondary market liquidity to retail investors participating through the RBI’s Retail Direct Scheme, launched in November 2021, to ensure fair and efficient market access, the report said.
Highlighting structural issues in the government securities market, Malhotra pointed to the relatively low turnover ratio—defined as annual trading volume relative to outstanding securities—which remains just above one. Liquidity, he said, remains concentrated in a few securities, with longer-dated instruments seeing thin trading. Moreover, market activity is largely dominated by banks and primary dealers, while many institutional investors continue to follow a "buy and hold" approach.
In 2024, the top ten institutional investors accounted for one-third of all turnover in government securities, out of more than 3,000 participants, Malhotra noted.
Foreign Investors
He also welcomed the growing presence of foreign investors in Indian government bonds, a trend accelerated by the country’s inclusion in global bond indices. Foreign ownership of government securities rose to 3.2 per cent in 2024, up from 1.7 per cent in August 2023. Participation by non-residents in derivatives markets has also been on the rise.
Reflecting on policy changes since January 2020, when banks were allowed to trade foreign exchange beyond regular onshore hours, Malhotra observed that while some trading takes place before and after domestic market hours, volumes remain modest. This, he suggested, indicates that India is still progressing toward a fully active 24x5 foreign exchange market.
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