Indian banks on Monday launched a new product that will deepen the money market and provide another investment avenue for the cash-flush sector, dealers said.
The first deal in the "collateralised borrowing and lending obligation" was struck between ICICI Securities and Finance Company, a leading primary dealer in government securities, and Saraswat Bank, a cooperative bank, for 50 million rupees at 6.0 per cent for one-day term.
A product of the Clearing Corporation of India, the instrument was approved by the Reserve Bank of India in October last year, to provide a mechanism to borrow and lend funds against securities for maturities of one day to one year.
Dealers said the instrument will also help borrowers meet short-term cash mismatches apart from eventually aiding the development of a short-term rupee yield curve.
India is yet to develop a term money market like the one based on London Inter Bank Offered Rate because both borrowers and lenders rely heavily on overnight funds.
But with the central bank putting curbs on banks' exposure to the overnight funds, a liquid and a credible term-money market is gradually expected to take off.
"It will benefit borrowers who have exhausted overnight fund limits from other banks," said Satish Jeurkar, chief manager, money markets at Saraswat Bank. "It can also be used by participants to trade on their interest rate views."
The RBI lowered the access to inter-bank call market for primary dealers and banks in early October, to half their net-owned funds -- the sum of their capital and free reserves -- or two per cent of their deposit base, whichever is higher.
The access for banks was further reduced in December when the central bank halved the lending limit to 25 per cent of net owned funds and cut borrowing by a third, so as to not exceed two percent of aggregate deposits or 100 per cent of net owned funds.
Parallel tp repos
Traders said the new instrument, in which the Clearing Corp is a counter-party, would also act as a parallel to the inter-bank repo market where volumes last Friday touched Rs 32.6 billion and most deals were struck at 5.50-6.00 per cent.
"The product will help banks with large holdings of government securities to park surplus funds in the short term," said Manoj Rane, chief dealer at Bank of America Securities. "But it remains to be seen whether this will happen."
The RBI also holds daily repo and reverse repo auctions at a fixed rate -- currently at 5.50 percent and 7.50 respectively -- to manage liquidity.
India has in the past 12 months seen forex inflows of over $22 billion, pushing reserves to a record of over $71 billion.
Most of these inflows have been absorbed by the central bank leading to a surge in rupee supplies with banks, which the RBI governor Bimal Jalan has acknowledged was causing a liquidity management problem.
© 2025