8 Market Report- Issues of Concern

sunandaC

New member
Unfortunately, money markets as a whole are not developed. The biggest problem continues to be the structure of the money market. Two-way quotes are a fundamental necessity for a proper yield curve to develop and a reference rate to be established.

The RBI does not encourage lend/borrow transaction on the same day. While foreign banks and some of the new banks are perennial borrowers in the inter-bank market, several nationalised banks and institutions are perennial lenders. This leaves the primary dealers to do the trading. But their limited funds do not enable them to become large players.

This gives rise to uni-directional players who are averse to two-way quotes. This deters the development of a benchmark around which a term market can evolve.
Right now, whatever trading is done is through the fixed rate. For IRS to happen there should be swaps in maturities.

A benchmarking has to be done and for that we need a correct reference rate, which will have to evolve beyond the overnight rate (MIBOR). That can happen only if a term money market is in place.

In India fixed rates are aplenty with banks and institutions borrowing and lending at fixed rates. They also adopt floating rates (Prime Lending Rate or PLR) while lending. But the PLR has two crucial deficiencies compared to rates like LIBOR: PLR is not a market related rate, but determined, somewhat arbitrarily, on the basis of the bank rate.

Besides there are no two-way quotes in PLR, in the absence of which swap deals virtually become infructuous. Rates like LIBOR, Fed Funds Rate/ T.Bill Rate are those at which banks are prepared to lend and borrow in any currency.

In India too, such a market does exist for the rupee- the call money market. Banks borrow/lend at market determined rates.

But where the Indian money market differs from other major financial centers is that, in the latter money is available for periods ranging from 1 or 7 days to 3, 6 and 12 months, whereas in India, rupee is available for a day or two, up to a maximum period of 13 days, as a general rule. The reason being the fortnightly reserve requirements.

Another deficiency is the lack of integration with the foreign exchange (FX) markets. In order to protect and control the exchange rate of the rupee, strong silos have been created.

Forward premium between the rupee and another foreign currency does not reflect the interest rate differential. If anything, it reflects the estimated risk of depreciation of the local unit against the dollar.

This gives rise to significant arbitrage opportunities between the two markets, which are protected through the RBI diktat. At present, the tenors available in the IRS market are short and the benchmark limited to only one, the Mumbai Inter-bank Offer Rate (MIBOR).
 

rosemarry2

MP Guru
Unfortunately, money markets as a whole are not developed. The biggest problem continues to be the structure of the money market. Two-way quotes are a fundamental necessity for a proper yield curve to develop and a reference rate to be established.

The RBI does not encourage lend/borrow transaction on the same day. While foreign banks and some of the new banks are perennial borrowers in the inter-bank market, several nationalised banks and institutions are perennial lenders. This leaves the primary dealers to do the trading. But their limited funds do not enable them to become large players.

This gives rise to uni-directional players who are averse to two-way quotes. This deters the development of a benchmark around which a term market can evolve.
Right now, whatever trading is done is through the fixed rate. For IRS to happen there should be swaps in maturities.

A benchmarking has to be done and for that we need a correct reference rate, which will have to evolve beyond the overnight rate (MIBOR). That can happen only if a term money market is in place.

In India fixed rates are aplenty with banks and institutions borrowing and lending at fixed rates. They also adopt floating rates (Prime Lending Rate or PLR) while lending. But the PLR has two crucial deficiencies compared to rates like LIBOR: PLR is not a market related rate, but determined, somewhat arbitrarily, on the basis of the bank rate.

Besides there are no two-way quotes in PLR, in the absence of which swap deals virtually become infructuous. Rates like LIBOR, Fed Funds Rate/ T.Bill Rate are those at which banks are prepared to lend and borrow in any currency.

In India too, such a market does exist for the rupee- the call money market. Banks borrow/lend at market determined rates.

But where the Indian money market differs from other major financial centers is that, in the latter money is available for periods ranging from 1 or 7 days to 3, 6 and 12 months, whereas in India, rupee is available for a day or two, up to a maximum period of 13 days, as a general rule. The reason being the fortnightly reserve requirements.

Another deficiency is the lack of integration with the foreign exchange (FX) markets. In order to protect and control the exchange rate of the rupee, strong silos have been created.

Forward premium between the rupee and another foreign currency does not reflect the interest rate differential. If anything, it reflects the estimated risk of depreciation of the local unit against the dollar.

This gives rise to significant arbitrage opportunities between the two markets, which are protected through the RBI diktat. At present, the tenors available in the IRS market are short and the benchmark limited to only one, the Mumbai Inter-bank Offer Rate (MIBOR).

Hey buddy,

Here I am up-loading Experiences of Small Businesses as Consumers in Regulated Markets, please check attachment below.
 

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