India's term money market—where financial institutions lend uncollateralized cash for 14 days to a year—has operated as an exclusive club for large commercial banks and primary dealers. Yesterday, the RBI released draft directions that fundamentally reshape access to this pool.
The new proposal allows All India Financial Institutions (NABARD, SIDBI) and Housing Finance Companies to participate as both active lenders and borrowers. HFCs can borrow up to 200% of their net owned funds in this uncollateralized market, signaling regulatory confidence in their stability.
Housing finance companies currently depend on expensive commercial bank loans and volatile bond markets for short-term liquidity. Direct access to the term money market will lower their overall cost of funds by tapping a deeper, more stable inter-bank liquidity pool.
The RBI's move creates a larger, more robust liquidity ecosystem. By allowing HFCs, AIFIs, and corporations to actively lend surplus cash into the market, the central bank is engineering faster transmission of policy rate cuts into consumer lending costs.
When the RBI cuts the repo rate, that reduction will now flow directly through the term money market into housing loan pricing for end borrowers. This structural deepening of the financial market reduces intermediation friction across the credit chain.
