India central banker warns of dwindling money market liquidity

India's call money market faces risks of dwindling liquidity, posing challenges for monetary policy transmission, the nation's central bank chief said in a speech published on Saturday.

Reserve Bank of India Governor Sanjay Malhotra expressed concern about "asymmetries which arise on occasions between different money market rates – the rate at which RBI provides liquidity, the call money rate, the market repo rate and TREPS (tri-party repo dealing system) rate".

Banks - the entities with sole access to the RBI's liquidity facilities, the call money market and the repo markets - must be proactive to ensure that the central bank's liquidity measures are "promptly and seamlessly" transmitted to the broader market, Malhotra told a conference in India on Friday that was uploaded to the RBI website on Saturday.

The call money rate is an overnight interest rate at which banks and other financial institutions lend and borrow from each other. When the RBI cuts interest rates or injects liquidity, it can push down the call money rate, transmitting the central bank's policy move to the system.

Surplus liquidity in India has averaged 1.7 trillion rupees ($20 billion) a day this month, reversing a four-month deficit, as the RBI stepped up its liquidity infusions to support growth.

The governor also called for deepening India's government securities market and improving liquidity and pricing by increasing participation from various stakeholders.

There is also a need for more proactive management of risks by different stakeholders in the derivatives market, enhancing market depth, increasing the diversity of views and fostering greater competition and efficiency, he said.