The Reserve Bank of India (RBI) has put forth a proposal to expand the term money market to include a broader array of financial institutions and companies. This move aims to enhance market liquidity and improve the transmission of monetary policy across different timeframes. The draft guidelines issued by the RBI suggest allowing non-banking financial companies (NBFCs), housing finance companies (HFCs), All India Financial Institutions (AIFIs), and companies to participate in the term money market, which is currently accessible primarily to banks and standalone primary dealers.
The RBI’s objective with this proposed framework is to enhance the effectiveness of policy rate transmission across various durations and foster a more dynamic term money market. Market participants and stakeholders have been invited by the central bank to provide feedback on the draft guidelines until July 25. The current participation in the term money market is predominantly limited to banks and standalone primary dealers, with certain prudential restrictions in place.
Under the proposed changes, All India Financial Institutions (AIFIs) and NBFCs, including HFCs but excluding base-layer NBFCs, would be permitted to both borrow and lend in the market. Additionally, companies would have the opportunity to participate as lenders. This move is anticipated to broaden the pool of borrowers and lenders in the unsecured money market, potentially enhancing liquidity and price discovery for maturities beyond overnight borrowing.
The RBI has also suggested relaxing borrowing limits for standalone primary dealers. According to the draft norms, standalone primary dealers could borrow up to 400 per cent of their net owned funds through term money and inter-corporate deposits combined. Their borrowing cap in the call and notice money markets would remain at 225 per cent of net owned funds on a fortnightly average basis. For NBFCs and HFCs, the proposed borrowing limit in the term money market stands at 200 per cent of net owned funds, while AIFIs would operate under board-approved limits within the existing regulatory exposure framework.
As per the draft guidelines, participants would have the freedom to negotiate interest rates, and transactions could be conducted either over-the-counter or through authorized electronic trading platforms. The RBI has suggested extending market hours from the current 9 am to 5 pm to 9 am to 7 pm on business days, or as specified by the central bank periodically.
