Recommendations of Three Committees
The issue of whether non-bank participants should constitute part of call/notice/term money market could be traced first in the Report of the Committee to Review the Working of the Monetary System (Chairman: S.Chakravarty) in 1985.
Since then, the Report of the Working Group on the Money Market (Chairman: N. Vaghul) in 1987 and the Report of the Committee on Banking Sector Reforms (Chairmana: M. Narasimham) in 1998 had also deliberated on this issue.
It needs to be appreciated that the particular set of recommendations from these three Committees have to be assessed against the specific objectives for which these Committees had been constituted as well as the differing initial conditions reflecting the state of Indian financial market which were prevailing at that particular point of time.
The Chakravarty Committee (1985) viewed this issue essentially from the angle of efficacy of monetary regulation by the Central Bank. It felt that allowing additional non-bank participants into the call market would not dilute the strength of monetary regulation by the RBI as resources from non-bank participants do not represent any additional resource for the system as a whole and their participation in call money market would only imply a redistribution of existing resources from one participant to another.
Therefore, the monopoly power to affect the system's reserves continues to rest with the RBI. In view of this, the Chakravarty Committee recommended that additional non-bank participants may be allowed to participate in call money market. The Vaghul Committee (1987) on the other hand suggested that call money market should be purely an inter-bank market and therefore, the restrictions on entry into call market prevailing at that point of time should continue.
The essential rationale for such recommendation was that freeing of entry into the call market coupled with allowing call money rates to be determined entirely by market forces at a time when deposit rates of banks were administered would lead to, it was apprehended, substantial diversion of funds from the bank deposit segment to the call money market segment which would raise the cost of funds to banks markedly.
Therefore, while the Vaghul Committee decided in favour of making the call money market a pure inter-bank market, it felt that LIC and UTI which had been permitted in the market as lenders in 1971 would gradually come out of the market as other money market instruments develop with wider array of maturities.
The Narasimham Committee II (1998) concurred with the Vaghul Committee as it also observed that call/notice/term money market in India, like in most other developed markets, should be strictly restricted to banks.
It, however, felt that exception should be made for Primary Dealers (PDs) who have been acting as market makers in the call money market and are formally treated as banks for the purpose of their inter-bank transactions and, therefore, they should remain as part of call money market. With regard to non-banks, it expressed concern that these participants "are not subjected to reserve requirements and the market is characterised by chronic lenders and chronic borrowers and there are heavy gyrations in the market".
It felt that allowing non-bank participants in the call market "has not led to the development of a stable market with liquidity and depth ……… and the time has come to undertake a basic restructuring of call money market". Like the Vaghul Committee, it had also suggested that the non-bank participants should be given full access to bill rediscounting, Commercial Paper (CP), Certificates of Deposit (CDs), Treasury Bills (TBs) and Money Market Mutual Funds (MMMFs) for deploying their short-term surpluses.
The issue of whether non-bank participants should constitute part of call/notice/term money market could be traced first in the Report of the Committee to Review the Working of the Monetary System (Chairman: S.Chakravarty) in 1985.
Since then, the Report of the Working Group on the Money Market (Chairman: N. Vaghul) in 1987 and the Report of the Committee on Banking Sector Reforms (Chairmana: M. Narasimham) in 1998 had also deliberated on this issue.
It needs to be appreciated that the particular set of recommendations from these three Committees have to be assessed against the specific objectives for which these Committees had been constituted as well as the differing initial conditions reflecting the state of Indian financial market which were prevailing at that particular point of time.
The Chakravarty Committee (1985) viewed this issue essentially from the angle of efficacy of monetary regulation by the Central Bank. It felt that allowing additional non-bank participants into the call market would not dilute the strength of monetary regulation by the RBI as resources from non-bank participants do not represent any additional resource for the system as a whole and their participation in call money market would only imply a redistribution of existing resources from one participant to another.
Therefore, the monopoly power to affect the system's reserves continues to rest with the RBI. In view of this, the Chakravarty Committee recommended that additional non-bank participants may be allowed to participate in call money market. The Vaghul Committee (1987) on the other hand suggested that call money market should be purely an inter-bank market and therefore, the restrictions on entry into call market prevailing at that point of time should continue.
The essential rationale for such recommendation was that freeing of entry into the call market coupled with allowing call money rates to be determined entirely by market forces at a time when deposit rates of banks were administered would lead to, it was apprehended, substantial diversion of funds from the bank deposit segment to the call money market segment which would raise the cost of funds to banks markedly.
Therefore, while the Vaghul Committee decided in favour of making the call money market a pure inter-bank market, it felt that LIC and UTI which had been permitted in the market as lenders in 1971 would gradually come out of the market as other money market instruments develop with wider array of maturities.
The Narasimham Committee II (1998) concurred with the Vaghul Committee as it also observed that call/notice/term money market in India, like in most other developed markets, should be strictly restricted to banks.
It, however, felt that exception should be made for Primary Dealers (PDs) who have been acting as market makers in the call money market and are formally treated as banks for the purpose of their inter-bank transactions and, therefore, they should remain as part of call money market. With regard to non-banks, it expressed concern that these participants "are not subjected to reserve requirements and the market is characterised by chronic lenders and chronic borrowers and there are heavy gyrations in the market".
It felt that allowing non-bank participants in the call market "has not led to the development of a stable market with liquidity and depth ……… and the time has come to undertake a basic restructuring of call money market". Like the Vaghul Committee, it had also suggested that the non-bank participants should be given full access to bill rediscounting, Commercial Paper (CP), Certificates of Deposit (CDs), Treasury Bills (TBs) and Money Market Mutual Funds (MMMFs) for deploying their short-term surpluses.