India’s central bank governor, Sanjay Malhotra, has flagged concerns over the smooth functioning of the country’s call money market, which is key to short-term borrowing among banks. In a recent speech, he pointed out that gaps between various short-term interest rates—like the call money rate, market repo rate, and the rate set by the RBI—can create friction in effectively transmitting monetary policy to the broader economy.
He emphasized that banks, which have exclusive access to the RBI’s funding tools and short-term markets, need to act swiftly and efficiently. Only then can the central bank’s decisions, such as rate cuts or liquidity support, reach the wider financial system in a timely manner and help guide interest rates as intended.
The governor also highlighted that the call money rate is a critical overnight rate that reflects how banks lend and borrow from each other. When liquidity is added into the system, this rate typically falls, helping spread the RBI’s policy stance across the financial network. Currently, the system is witnessing a surplus of funds, averaging around Rs 1.7 trillion per day in April, which marks a shift from earlier liquidity shortages.
Finally, Malhotra urged for a stronger and more inclusive government bond market. He believes that more participation and better liquidity in this market would lead to more accurate pricing of securities and make the entire financial system more resilient and efficient.
[…] Reserve Bank of India (RBI) has released its final guidelines on the Liquidity Coverage Ratio (LCR), and the changes are […]