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Growing asymmetries in short-term money market rates are threatening the effectiveness of monetary transmission. And this isn’t the view of a skeptic—it’s the Reserve Bank of India (RBI) that has flagged this concerning trend.

Despite the RBI’s efforts to inject liquidity into the system and adjust policy rates to guide economic momentum, the signals are failing to reach their intended targets.

The ripple effects could dampen credit flow, hinder inflation management, and erode overall economic confidence. At the core lies a clear disconnect between policy intent and its actual impact.

The money market rate—essentially the overnight interest rate that reflects the cost of very short-term funds in the banking system—is central to the issue. Complementing it are the market repo and tri-party repo rates, all crucial for the smooth functioning of India’s money markets.

Ideally, these rates should align with the RBI’s policy stance. When they don’t, they create uncertainty and undermine the central bank’s ability to influence borrowing costs across the economy.

The RBI has done its part by injecting significant liquidity following a prolonged deficit phase, averaging ₹1.7 trillion daily in April. This should have eased funding pressures and led to a uniform softening of rates. That it hasn’t suggests the presence of deeper structural inefficiencies.

Banks must shoulder greater responsibility in ensuring that policy measures are transmitted quickly and uniformly across the financial spectrum. It must not be forgotten that banks are the primary conduits for the RBI’s liquidity operations.

What’s especially troubling is that this misalignment is occurring during a period of surplus liquidity—a condition typically conducive to smooth rate transitions.

If systemic inefficiencies persist even under benign conditions, the risks become significantly more pronounced during periods of financial stress—whether from global shocks or domestic tightening.

This is not merely a technical concern for market participants. A wide range of economic activities—from home loan EMIs to working capital costs for small businesses—can be affected.In a global environment demanding agility and clarity in domestic economic management, such inefficiencies weaken the RBI’s capacity to control inflation or stimulate growth. But the burden of reform cannot rest with banks alone.

Against this backdrop, the RBI’s call for a broader and more liquid government securities market is both timely and necessary. Greater participation by mutual funds, insurance companies, and foreign institutions—non-bank players—can enhance price discovery and reduce overreliance on a few dominant actors.

Diversity of opinion and healthy competition are essential for a resilient financial system. While the Indian financial sector has made significant progress over the past two decades, these recent developments serve as a reminder that its foundational mechanisms still need attention.

All stakeholders must act with urgency and commitment—because the credibility of India’s economic framework depends on it.