Active market making needed in 182-day and 364-day Treasury bills: RBI Deputy Governor Patra

The situation in money markets in India calls for active market making in 182-day and 364- day Treasury bills (T bills) and perhaps issuances of T bills of other maturities as well so that a continuous risk-free yield curve emerges, according to Reserve Bank of India Deputy Governor MD Patra.

“In the secondary market, trading is concentrated in the 91-day T bills, with the 182-day and 364-day T bills being highly illiquid. Given this discontinuity, the situation in India calls for active market making in each of them...,” Patra said in his speech at the Treasury Heads’ Seminar organised by RBI at Lonavala.

The Deputy Governor said the bulk of money market activity is concentrated in the overnight segment, which has become the money centre.

“Consequently, as we proceed outwards on the term curve, we encounter India’s missing markets – the segment between 3 days and three months.

“The Reserve Bank has stepped in by removing statutory pre-emptions on inter-bank liabilities and by conducting term repos/reverse repos of varying maturities but to no avail,” Patra said.

Vestiges of the cash credit system and unnotified premature withdrawal of deposits add to these frictions, he added.

“Undoubtedly, alternatives exist in the form of overnight indexed swap rates, yields on treasury bills of residual maturity and polled term MIBORs, but nothing can substitute for a term curve generated from actual transactions,” emphasised Patra.

Other issue

Another issue in the overnight segment is that of traded deals and reported deals, the latter involving cooperative banks lending in the later half of the day to scheduled commercial banks at rates lower than traded rates and artificially pulling down the aggregation, the Deputy Governor said

This drives a wedge between the policy rate and the weighted average call money rate, which is the operating target, he added.

‘Thus, even before the monetary policy signal travels through the overnight and term segments of the money market to the next reference point on the yield curve – the 91-day T bill rate – some part is already lost in transmission,’ Patra said. 

The Deputy Governor underscored that about 40 per cent of resources mobilised through Commercial Papers is by non-banking financial companies or housing finance companies, which on-lend the funds after adding margins and premiums, thereby hindering monetary policy transmission.

“Thus, after the monetary policy action and stance gets seamlessly conveyed to the overnight market, the transmission progressively loses strength and sometimes direction as it meanders through the money market spectrum.

“In recognition of these impediments, central banks are often persuaded to increase the size of their rate changes disproportionately in relation to the desired objective to ensure an adequate amount of transmission, but this can increase borrowing costs inordinately and result in an overkill of economic activity,” he said.

Credit market

Patra observed that though the share of fresh loans linked to marginal cost of funds-based lending rates (MCLR) has been declining, nearly half of outstanding bank credit is still priced off the MCLR, delaying transmission via annual resets only, and with widely varying spreads.

Asset quality, expected loan losses in credit portfolios and sticky small savings interest rates are additional sources of variability in spreads, which highlights the significance of financial system soundness for smoother transmission, he added.

NBFCs

Patra said unlike banks, non-banking financial companies (NBFCs), which have a credit portfolio equivalent to about one fifth of outstanding bank credit, do not follow any uniform methodology for pricing their loans.

“While some NBFCs use their own prime lending rates as interest rate benchmarks, others use base rates or MCLRs of banks as external benchmarks. A few do not go by any interest rate benchmark. This discretionary pricing of spreads undermines monetary policy transmission,” he added.

COMMENT NOW