India central bank opens up term money market for non-banks, companies to boost liquidity

MUMBAI: India’s central bank said on Wednesday it will allow financial institutions, corporates and non-banking financial companies to access the term money market.

Analysts said the move could boost liquidity and improve pricing of short-term borrowings across tenures, but may hurt mutual funds.

Currently, only banks and standalone primary dealers can trade in the uncollateralised market, where funds are borrowed and lent for 15 days to one year. The Reserve Bank of India did not say when the new rules will take effect.

“Broadening participation in the term money market will deepen financial markets, enhance systemic efficiency, and strengthen overall financial stability,” Ajay Kumar Srivastava, managing director and CEO at Indian Overseas Bank, said.

The central bank will also raise borrowing limits for standalone primary dealers and outline a framework for the changes soon, it said in its policy statement earlier in the day.

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“An active-term money market, apart from providing an alternative funding avenue to the market participants, also helps in enhancing monetary policy transmission by creating a link between the overnight money market and longer-term interest rates,” the Reserve Bank of India said in its statement.

Volumes in the term money market have been historically low.

Daily average volumes were 14.7 billion rupees ($158.74 million) from April 2025 to January 2026, compared with 41.7 billion rupees in notice money, where funds are exchanged for 2-14 days, and 274 billion rupees in the overnight call money market, central bank data showed.

Corporates and NBFCs park excess cash in liquid mutual fund schemes, and direct participation in term money could hurt these funds.

Allowing them direct bilateral access to borrow or deploy surplus funds would be a meaningful step but could also affect liquid funds, said Soumyajit Niyogi, director at India Ratings & Research.

“Given the unsecured nature of such transactions, the framework will need tight safeguards — both prudential and counterparty-specific limits to avoid distortions in credit behavior.”