Evolution and developments in India’s money markets

Deepak Mohanty of RBI gives really good speeches.

In his recent speech, he explains how India’s money markets have evolved and developed over the years. It also has some basics about money market and its role in an economy..

He makes three suggestions towards the end:

First, there has been a swift transmission of policy rate at the short-end of money market, partly due to the prevalence of market liquidity in deficit mode. However, ensuring market liquidity in a deficit mode of desired level on a sustained basis is contingent on Reserve Bank’s ability to effectively conduct OMOs and the market appetite for such operations. Hence, there is a need to develop the market micro-structure and further enhance secondary market transactions in government securities to facilitate smooth conduct of OMOs.

Second, the LAF is not the appropriate instrument for managing the liquidity of more enduring nature. As the system is expected to be in deficit, there is a need to develop term repo to minimise daily requirement of liquidity.

Third, notwithstanding significant advances in developing the market, the term structure in the money market is incomplete. It is, therefore, desirable to extend the yield curve beyond the overnight rate by developing a term-money market.

Second and third are interlinked..Term repo will help in both the tasks of providing term market liquidity and extending the yield curve beyond the overnight rate..

The first one is more interesting. As my report shows, RBI has been relying extensively on forex assets to create liquidity since 2004-05 onwards. Share of Rupee securities in RBI Balance sheet declined significantly. Since last year, as forex flows slowed and RBI intervened to prevent rupee depreciation, RBI relied more on rupee securities via LAF repo and OMO purchases.

As forex assets are beyond RBI’s control, it does not have a choice but to look at Rupee securities to keep liquidity in deficit mode. It will be interesting to see what RBI does in future. Will it announce OMOs as it does now or does more secondary market  OMO actions as Fed does..


3 Responses to “Evolution and developments in India’s money markets”

  1. Tanisha Says:

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  2. mohit jain Says:

    What is recent developments in indian money market and primary market in Hindi sir please tell me about this

    • Amol Agrawal Says:

      Hi Mohit. Sorry for late reply. See RBI’s Monetary Policy report released during monetary policy. It covers money market developments. Though all this in English. Do write to RBI requesting them to start releasing their analysis in Hindi as well.

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