Changing Tides in the Indian Money Market

In the the Nov-2021 Monthly Bulletin, Archana Dilip discuses evolution of Indian money markets from 2016 t0 2021:

Money market provides short-term capital to a wide class of financial entities and plays a key role in the transmission of monetary policy. This article reviews the important segments of the Indian money market in terms of volume, rate, microstructure, and dispersion of rates for the period from January-2016 to March-2021.


    • The overnight money market volatility, in terms of volume-weighted rates, increased after the declaration of Covid-19 pandemic, and peaked in March-2020. The volatility declined subsequently. A shift away from the unsecured segment to secured segments was also witnessed after the declaration of the Covid-19 pandemic.
    • A study of the intraday market activity and network structure of the call money segment suggests increased portfolio diversification after the onset of the pandemic.
    • The constructed dispersion index (covering six segments of the money market), that serves as an empirical gauge of pass-through efficiency, suggests a frictionless market with efficient pass-through for the period from January-2020 to February-2020.

The dispersion index that peaked in March-2020 showed a decreasing trend at the end of the sample period considered. The sector-specific, institution-specific and instrument-specific liquidity measures undertaken by the Reserve Bank in the recent times have resulted in the stabilisation of the money market with the market adapting to the new normal.



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