Proposed regulatory changes are expected to increase market liquidity, boost trading volumes by up to 60%, lower funding costs for highly rated NBFCs, and strengthen India's overall money market ecosystem.

The Reserve Bank of India (RBI) is set to significantly broaden participation in the country's term money market by proposing access for Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), All India Financial Institutions (AIFIs), and eligible corporates. Market participants believe the move could mark a major structural reform for India's financial markets by expanding liquidity, improving price discovery, and creating more efficient avenues for short-term funding.

According to treasury executives, the proposal could increase trading activity in the term money market by 40–60% during the first year, with overall market turnover potentially doubling over the next two to three years as participation widens.

The initiative forms part of the RBI's broader strategy to deepen domestic financial markets, diversify funding sources, and improve liquidity transmission across the banking and non-banking financial sectors.

Understanding the Term Money Market

The term money market is an important segment of India's money market where financial institutions borrow and lend funds for periods exceeding 14 days.

Unlike the overnight call money market, the term money market enables institutions to secure funds for longer durations, helping them manage liquidity requirements, balance asset-liability mismatches, and optimise treasury operations.

Currently, participation is largely dominated by banks and primary dealers. The RBI's proposal seeks to create a broader and more diversified marketplace by allowing additional financial institutions to actively participate.

A larger participant base is expected to make the market deeper, more liquid, and more efficient.

Wider Participation to Improve Market Liquidity

One of the biggest expected outcomes of the RBI proposal is a substantial improvement in market liquidity.

As more institutions enter the term money market, the number of borrowers and lenders will increase, resulting in higher transaction volumes and more competitive pricing.

Treasury experts estimate that average trading volumes could rise between 40% and 60% during the initial year following implementation.

Over the medium term, increased familiarity with the framework and growing institutional participation could potentially double overall market turnover, making the term money market a much more significant source of short-term funding.

Improved liquidity also reduces funding concentration risk and enhances market resilience during periods of financial stress.

Lower Borrowing Costs for Strong NBFCs

The proposal is expected to provide meaningful funding benefits to financially strong NBFCs.

Treasury professionals estimate that AAA-rated NBFCs could borrow at interest rates approximately 5–10 basis points lower than comparable three-month Commercial Paper (CP) rates.

The reduction would be driven by increased competition among lenders and greater availability of surplus liquidity from banks seeking attractive short-term investment opportunities.

Lower funding costs could improve profit margins, strengthen balance sheets, and allow leading NBFCs to offer more competitive lending products across retail, housing, vehicle finance, MSME lending, and infrastructure financing.

Banks Could Benefit from Better Liquidity Deployment

The proposal is not only beneficial for NBFCs but also creates new opportunities for banks.

Banks frequently maintain surplus liquidity that needs to be deployed efficiently. By allowing them to lend directly to eligible NBFCs in the term money market, the RBI is creating another avenue for generating returns while maintaining prudent risk management.

Greater participation from banks could improve overall liquidity distribution across the financial system while strengthening monetary policy transmission.

A more active inter-institutional funding market also enhances flexibility in liquidity management during changing market conditions.

Stronger Financial Market Infrastructure

The RBI has consistently worked towards strengthening India's financial market architecture through regulatory reforms and market development initiatives.

Expanding participation in the term money market aligns with broader objectives such as:

• Improving liquidity across financial markets.

• Enhancing efficiency in short-term funding.

• Strengthening monetary policy transmission.

• Diversifying funding sources beyond traditional bank borrowing.

• Building a more resilient financial system.

A deeper and more active money market can also reduce systemic risks by providing institutions with multiple funding alternatives during periods of market volatility.

Positive Outlook for the NBFC Sector

The proposed framework could represent a significant milestone for India's NBFC industry, which plays a vital role in financing sectors that are often underserved by traditional banks.

NBFCs contribute significantly to lending across retail finance, affordable housing, commercial vehicles, consumer finance, microfinance, infrastructure, and small businesses.

Greater access to institutional funding may help improve liquidity management, reduce refinancing risks, and strengthen long-term financial stability.

The reform could also enhance investor confidence by providing NBFCs with a more diversified funding base.

Corporate Participation Adds Depth

The RBI proposal also allows eligible corporates to participate in the term money market, although only as lenders.

This provision enables cash-rich companies to deploy surplus funds more efficiently while contributing additional liquidity to the market.

By widening the pool of lenders, the market is expected to become more competitive, resulting in better price discovery and improved funding efficiency for borrowers.

The participation of corporates also strengthens the overall ecosystem by creating a broader network of institutional liquidity providers.

Challenges to Watch

While the proposal has been widely welcomed, market participants believe effective implementation will be critical.

Risk management standards, exposure limits, credit assessment frameworks, and operational readiness will play important roles in ensuring that expanded participation does not increase systemic risk.

The RBI is expected to maintain prudent regulatory oversight to balance market development with financial stability.

Industry participants also expect gradual adoption rather than an immediate surge in borrowing activity, as institutions adapt to the new framework.

Outlook

The RBI's proposal to allow NBFCs into the term money market has the potential to become one of the most significant structural reforms for India's short-term funding ecosystem in recent years. By expanding market participation beyond banks and primary dealers, the central bank aims to improve liquidity, deepen financial markets, and create more efficient funding channels for the broader financial sector.

If implemented successfully, the reform could lead to higher trading volumes, lower funding costs for highly rated NBFCs, stronger liquidity management, and improved monetary policy transmission. As India's financial markets continue to mature, initiatives such as this are expected to strengthen the resilience, efficiency, and competitiveness of the country's banking and non-banking financial ecosystem.