RBI may unveil fresh steps to make money markets efficient

MUMBAI/HYDERABAD: India���s central bank has signalled its intention to unveil new measures to make the money markets more efficient.

The Reserve Bank of India (RBI) is in the process of forming a new technical committee for money and forex markets, consisting of representatives from various financial regulators, a person familiar with the
development said.

While the broader contours of the mandate are still being worked out, the committee will primarily look at making the money markets more efficient. Through greater co-ordination between the reverse repo-repo, call and collateralised lending and borrowing operations (CBLO) markets, it proposes to put an end to any major fluctuations in overnight rates.

This is something that has often destabilised the financial market in the past. The proposed committee is to be headed by RBI deputy governor Rakesh Mohan.

The move is in line with RBI���s stated policy of trying to keep overnight money market rates between reverse repo and repo rates. The liquidity adjustment facility (LAF), through which RBI lends to cash-starved banks, or absorbs surplus funds from them at fixed rates, was introduced in the late 90s.



But over the years, the overnight rates, at which banks lend and borrow money among themselves, have often overshot or gone below the corridor.

For instance, in 2006, the overnight rates had risen close to 100% at one time while it collapsed to near zero levels a year ago. Banks seek stability in the overnight rates, when lending to the public.

Now, RBI feels that if the clearing systems and other associated arms of the three markets get speaking to each other more effectively, such mismatches can be kept to a bare minimum. But the process may be tricky.

While the inter-bank call market is an unsecured market ��� as lending and borrowing are done without securities as collateral ��� it is mandatory to have the backing of securities in the CBLO market. For instance, the committee is considering whether newer players can be introduced in the CBLO segment.

It has told IRDA, India���s insurance regulator, to assign its representative to the committee, hinting that insurance players could be given greater role in smoothening the market. Insurers have been cash-rich players over the years, having accumulated a surplus stock of government securities.

Cash-rich corporates have had a very little role to play in the CBLO market, since the transactions are done only through government paper. This, too, may be tweaked. Sebi has already said that it is working toward allowing repo of corporate bonds, where banks can borrow in lieu of the corporate bonds they hold.

Experts have been pointing out that India���s overnight interest rates swap market (based on benchmarks like the MIFOR ��� derived from Libor and currency forward margins) is still not very efficient.

The Percy Mistry Committee had explicitly pressed for a well-functioning Bond Currency Derivatives (BCD) nexus, where markets for government bonds, corporate bonds and currencies worked as a seamless whole. RBI���s latest move could be another step in that direction.