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21-04-2025
Bureau Report
NEW DELHI/ MUMBAI: India’s call money market faces risks of dwindling liquidity, posing challenges for monetary policy transmission, the Nation’s Central Bank Chief said in a speech published on Sunday.
Reserve Bank of India Governor Sanjay Malhotra expressed concern about “asymmetries which arise on occasions between different money market rates, the rate at which RBI provides liquidity, the call money rate, the market repo rate and TREPS (tri-party repo dealing system) rate”.
Banks, the entities with sole access to the RBI’s liquidity facilities, the call money market and the repo markets must be proactive to ensure that the central bank’s liquidity measures are “promptly and seamlessly” transmitted to the broader market, Malhotra told a conference in India on Friday that was uploaded to the RBI website on Saturday.
The call money rate is an overnight interest rate at which banks and other financial institutions lend and borrow from each other. When the RBI cuts interest rates or injects liquidity, it can push down the call money rate, transmitting the central bank’s policy move to the system.
Surplus liquidity in India’s has averaged 1.7 trillion rupees ($20 billion) a day this month, reversing a four-month deficit, as the RBI stepped up its liquidity infusions to support growth.
The governor also called for deepening of India’s government securities market and improving liquidity and pricing by increasing participation from various stakeholders.
There is also a need for more proactive management of risks by different stakeholders in the derivatives market, enhancing market depth, increasing the diversity of views and fostering greater competition and efficiency, he said.
A couple of weeks ago, the Reserve Bank of India (RBI) lowered its key repo rate on Wednesday for a second consecutive time and changed its monetary policy stance signaling room for more cuts ahead, as it seeks to boost the sluggish economy in the face of fresh U.S. tariffs.
India became the second central bank after the Reserve Bank of New Zealand to cut interest rates since the wide-ranging trade levies were announced.
The tariffs have raised the risk of a global slowdown and a U.S. recession while sparking financial turmoil, leaving emerging market central banks facing a tough choice between cutting rates to support growth and shoring up their fragile currencies.
India’s Monetary Policy Committee (MPC), which consists of three RBI and three external members, cut the repo rate (INREPO=ECI), opens new tab by 25 basis points to 6.00% as expected. It started reducing rates with a quarter-point reduction in February, its first cut since May 2020.
The central bank also changed its stance to “accommodative” from “neutral”.
The 26% tariffs announced by the US on imports from India have exacerbated uncertainties but quantifying the impact on growth is difficult, central bank Governor Sanjay Malhotra said in his statement.
“Growth is improving after a weak performance in the first half of the financial year 2024-25, although it still remains lower than what we aspire for,” said Malhotra, adding that the inflation outlook is benign.
All six MPC members voted to cut the repo rate and change the policy stance.
The change in stance means the MPC is considering only two options, either status quo or a rate cut, and the stance does not directly link to liquidity conditions, he said. ($1 = 85.4290 Indian rupees)
