Phasing Out of Non-Banks Participants
The call/notice money market is the most important segment in the Indian money market. In this market, while banks and primary dealers (PDs) are allowed to both borrow and lend, non-bank participants such as financial institutions, mutual funds and select corporates are permitted to only lend.
Though non-bank participants holding current account and SGL account with the RBI are permitted to undertake both repo and reverse repo, the ease of transactions as well as low transaction costs arising from least documentation and same day settlement of funds in call/notice money market act as strong incentives for non-bank participants to prefer the latter to the former.
This is impeding the development of a risk free short-term yield curve and, hence, the pricing in other segments of the debt market. Therefore, a "basic restructuring of call money market" to make it a pure inter-bank market, as put forward by the Report of the Committee on Banking Sector Reforms (1998), was considered necessary. Towards this end, the Reserve Bank of India (RBI) has already initiated a number of steps to widen the repo market in terms of increasing the eligible securities and participants.
While there is a consensus that complete withdrawal of non-bank participants from the call/notice money market (henceforth, only call money market for convenience) should be co-terminus with full fledged operationalisation of the Clearing Corporation, it is felt that during the intermediate period, their operations should be phased out in such a manner that their migration to repo/reverse repo market becomes smooth and there is no disruption in the call money market.
In order to accomplish this restructuring process, the mid-term review on Monetary and Credit Policy in October 2000 indicated that a Technical Group comprising officials from both banks and non-banks should be constituted in order to suggest ways for planned reduction in access by non-bank participants to call money market such that their transition to repo market become smooth.
Following this, a Technical Group was constituted by Dr. Y.V. Reddy, Deputy Governor with appropriate representations from banks, non-banks and RBI on December 9, 2000 (Annexure I). The Report is organised in four Sections. While Section I discusses recommendations of the three Committees with regard to participation of non-banks in call money market followed by international experiences in this regard, Section II analyses the typical characteristics of Indian call money market.
Section III delineates the circumstances in which the non-bank participants were allowed entry into the call money market during 1990s despite recommendations to the contrary by the Working Group on the Money Market (Chairman : N. Vaghul) in 1987 as discussed in Section I. This Section also discusses the shift in stance of the RBI during the later part of 1990s and the efforts made by it to phase out non-bank participants from the call money market since then. Finally, Section IV presents policy perspectives and recommendations of the Technical Group.
The call/notice money market is the most important segment in the Indian money market. In this market, while banks and primary dealers (PDs) are allowed to both borrow and lend, non-bank participants such as financial institutions, mutual funds and select corporates are permitted to only lend.
Though non-bank participants holding current account and SGL account with the RBI are permitted to undertake both repo and reverse repo, the ease of transactions as well as low transaction costs arising from least documentation and same day settlement of funds in call/notice money market act as strong incentives for non-bank participants to prefer the latter to the former.
This is impeding the development of a risk free short-term yield curve and, hence, the pricing in other segments of the debt market. Therefore, a "basic restructuring of call money market" to make it a pure inter-bank market, as put forward by the Report of the Committee on Banking Sector Reforms (1998), was considered necessary. Towards this end, the Reserve Bank of India (RBI) has already initiated a number of steps to widen the repo market in terms of increasing the eligible securities and participants.
While there is a consensus that complete withdrawal of non-bank participants from the call/notice money market (henceforth, only call money market for convenience) should be co-terminus with full fledged operationalisation of the Clearing Corporation, it is felt that during the intermediate period, their operations should be phased out in such a manner that their migration to repo/reverse repo market becomes smooth and there is no disruption in the call money market.
In order to accomplish this restructuring process, the mid-term review on Monetary and Credit Policy in October 2000 indicated that a Technical Group comprising officials from both banks and non-banks should be constituted in order to suggest ways for planned reduction in access by non-bank participants to call money market such that their transition to repo market become smooth.
Following this, a Technical Group was constituted by Dr. Y.V. Reddy, Deputy Governor with appropriate representations from banks, non-banks and RBI on December 9, 2000 (Annexure I). The Report is organised in four Sections. While Section I discusses recommendations of the three Committees with regard to participation of non-banks in call money market followed by international experiences in this regard, Section II analyses the typical characteristics of Indian call money market.
Section III delineates the circumstances in which the non-bank participants were allowed entry into the call money market during 1990s despite recommendations to the contrary by the Working Group on the Money Market (Chairman : N. Vaghul) in 1987 as discussed in Section I. This Section also discusses the shift in stance of the RBI during the later part of 1990s and the efforts made by it to phase out non-bank participants from the call money market since then. Finally, Section IV presents policy perspectives and recommendations of the Technical Group.