Over-the-Counter (OTC) Market

The Over-the-Counter (OTC) market refers to a decentralised financial market in which securities and financial instruments are traded directly between parties without being listed on a formal exchange. In India, the OTC market forms a vital segment of the financial system, particularly for instruments such as government securities, corporate bonds, money market instruments, derivatives, and foreign exchange products. Its flexible, negotiated nature makes it especially relevant for institutional participants and plays a significant role in banking operations, monetary transmission, and overall financial stability.
Within the Indian economy, the OTC market complements exchange-based trading by enabling customised transactions, large-value deals, and efficient risk management across sectors.

Concept and meaning of the OTC market

An OTC market is characterised by bilateral or multilateral negotiations between buyers and sellers, often facilitated by dealers, brokers, or electronic trading platforms, rather than a centralised order-matching system. Prices, quantities, and settlement terms are agreed upon privately, allowing greater flexibility compared to exchange-traded markets.
Unlike exchange markets, OTC markets do not require standardised contracts or continuous price quotations. This makes them suitable for instruments that are heterogeneous, less liquid, or tailored to specific risk management needs.

Structure of the OTC market in India

The Indian OTC market is predominantly institutional, with participation from banks, financial institutions, mutual funds, insurance companies, corporates, and primary dealers. Retail participation is limited due to the complexity and large transaction sizes typically involved.
Key segments of the Indian OTC market include government securities, corporate bonds, money market instruments such as treasury bills and commercial paper, foreign exchange transactions, and interest rate derivatives. Many of these transactions are executed through electronic platforms but remain OTC in nature due to negotiated pricing and bilateral execution.

Regulatory framework and oversight

The OTC market in India operates within a regulated environment overseen primarily by the Reserve Bank of India for money markets, government securities, and foreign exchange instruments, and by the securities market regulator for corporate debt and derivatives.
While OTC trading allows flexibility, regulatory requirements mandate reporting, transparency, and settlement discipline. Post-trade reporting of OTC transactions to authorised platforms enhances market oversight and supports price discovery without compromising execution flexibility.

Role in banking and financial intermediation

For banks, the OTC market is central to treasury operations, liquidity management, and risk hedging. Banks actively use OTC markets to trade government securities, manage interest rate and currency risks, and adjust balance sheet positions.
OTC transactions allow banks to execute large trades efficiently with minimal market impact. This is particularly important for managing statutory liquidity requirements, interest rate exposure, and funding costs.

Importance in monetary policy transmission

The OTC market plays a crucial role in the transmission of monetary policy in India. Key policy signals influence yields and rates in OTC segments such as the government securities market, money market, and foreign exchange market.
Changes in policy rates, liquidity conditions, and central bank operations are reflected in OTC market prices, which in turn influence lending rates, investment decisions, and capital flows across the economy.

Advantages of the OTC market

The OTC market offers several advantages, including flexibility in contract design, ability to execute large-value transactions, and suitability for customised risk management. It supports innovation in financial products and allows participants to tailor instruments to specific needs.
For the Indian financial system, OTC markets provide depth and resilience, particularly in segments where exchange trading may be less efficient or practical.

Limitations and risks

Despite its benefits, the OTC market has certain limitations. Lower pre-trade transparency can make price discovery more challenging, especially for smaller participants. Counterparty risk is also higher due to the bilateral nature of transactions, requiring strong risk management and settlement mechanisms.
Market concentration among large institutional participants can further limit access and liquidity. Regulators address these risks through reporting requirements, standardisation initiatives, and strengthened clearing and settlement systems.