RBI proposes opening term money market to NBFCs, companies
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The Reserve Bank of India (RBI) has proposed widening participation in the term money market to include more types of institutions. Under the draft rules, non-banking financial companies (NBFCs), housing finance companies (HFCs), All India Financial Institutions (AIFIs) and corporates will be allowed to access this market, which so far has been largely confined to banks and standalone primary dealers.
According to the RBI, the objective is to enhance liquidity and improve the transmission of monetary policy across various interest-rate maturities. The central bank has sought feedback from stakeholders and market participants on these draft directions by 25 July.
Currently, only banks and standalone primary dealers can operate in the term money market, and even they are subject to prudential limits. Under the proposed framework, AIFIs and NBFCs (including HFCs but excluding base-layer NBFCs) will be permitted to both borrow and lend in the term segment, while companies will be allowed to participate only as lenders.
Market participants expect that bringing in these additional entities will substantially expand the base of borrowers and lenders in the unsecured money market. This is seen as a way to improve price discovery and deepen liquidity for maturities beyond overnight funds.
The RBI has also suggested relaxing borrowing limits for standalone primary dealers. As per the draft norms, these PDs may borrow up to 400% of their net owned funds through a combination of term money and inter-corporate deposits. Their existing borrowing ceiling in the call and notice money markets will remain at 225% of net owned funds on a fortnightly average basis.
For NBFCs and HFCs, the proposed borrowing limit in the term money market is set at 200% of net owned funds. AIFIs will operate within board-approved limits that must comply with current regulatory exposure guidelines.
The RBI has stated that interest rates will continue to be freely negotiated between counterparties. Deals can be executed either over-the-counter or via authorised electronic trading platforms. Proposed trading hours for the term money market are from 9 a.m. to 7 p.m. on business days, or as otherwise notified by the RBI. At present, the call and money markets operate from 9 a.m. to 5 p.m.
The draft directions also aim to enhance transparency and reporting discipline. All call, notice and term money transactions that are not executed on the RBI-run NDS-CALL platform must be reported to that platform within 15 minutes of the trade.
Participants who are eligible but not yet members of NDS-CALL will need to obtain membership within six months of the new rules taking effect.
Any cancellations or early terminations of trades will also have to be reported within 15 minutes. The RBI has proposed that any instances of misreporting or duplicate reporting be promptly communicated to both the NDS-CALL operator and the central bank.
The proposed framework keeps the current structure of the call and notice money markets intact. Scheduled commercial banks, small finance banks, regional rural banks, co-operative banks and standalone primary dealers will continue to act as both borrowers and lenders. Payments banks will remain eligible to borrow and lend in the call and notice segments, but in the term money market they will be allowed to participate only on the borrowing side.
This proposal stems from the RBI’s April 8 monetary policy announcement, where governor Sanjay Malhotra underscored the importance of developing a more vibrant term money market. The April policy statement noted that an active term money market not only offers an additional funding source to participants but also strengthens monetary policy transmission by linking overnight rates with longer-term interest rates.
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