The Hindu Business Line : Call money market: More flexibility for banks likely

The Reserve Bank of India has said that banks may be allowed to borrow and lend in the inter-bank call money market based on their asset liability match rather than prudential limits.

The RBI report on Currency and Finance says, "In view of the transformation of the call money market into a pure inter-bank market, there may be a need to provide greater flexibility to banks and primary dealers to borrow or lend in the market depending upon the robustness of the risk management practices being followed by them. Prudential limits on borrowing and lending in the inter-bank market could be replaced by the banks' own internal ALM framework."

In the call market, banks can currently borrow not beyond 100 per cent of their capital funds on a fortnightly average basis and on daily basis it cannot exceed 125 per cent. They can lend up to 25 per cent of their capital funds on a fortnightly average basis and 50 per cent on a daily basis.

With the rising credit demand, the RBI will also review the Inter-bank Participation Certificates scheme to improve asset liability management and liquidity management.

The debt market would require more investors if the Statutory Liquidity Ratio of banks is cut, the RBI said.

With respect to SLR, the central bank said, "The investor base needs to be widened in view of the possibility of reduction in the captive investor base resulting from the scaling down of the SLR from the present level." Banks currently have to maintain a minimum of 25 per cent of government securities as SLR.

Reserve requirements

The RBI said that although it has progressively de-emphasised reserve requirements as an instrument of monetary policy, the current state of market development has made it necessary to keep the option flexible. Reserve requirement implies the Cash Reserve Ratio that banks have to maintain with the RBI.

On the debt market, the central bank observes in the report that the turnover in the secondary government securities market rises during the falling interest rate cycle but declines during the rising interest rate cycle.

According to the RBI, the liquidity can be improved through the active consolidation of existing securities, phased increase in marked to market portfolio of banks and early introduction of Separately Tradable Registered Interest and Principal of instruments.

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