Rakesh Mohan: Development of financial markets in India
Address by Dr Rakesh Mohan, Deputy Governor of the Reserve Bank of India, at the First
Indian-French Financial Forum, Mumbai, 16 May 2007.
The assistance of Janak Raj, Jai Chander and Partha Ray in preparing this address is gratefully acknowledged.
* * *
I am delighted to have the opportunity of speaking on the issue of development of financial markets
along with Mr. Christian Noyer, Governor of the Banque de France. He has displayed a deep
commitment to the development of financial markets over the years and we heard a very thoughtful
speech from him on this subject at the Reserve Bank just two days ago. His approach to financial
markets is marked by a great degree of pragmatism: as we develop financial markets we need to
make sure that they serve our needs, and we have to be equally conscious of the risks that they can
generate if not managed well.
I welcome this opportunity to document the development of financial markets in India over the past
decade and a half. With acceleration in economic growth in the country, the step up in savings and
investments, and expanded horizons of market participants, along with renewed thinking on fuller
capital account convertibility, discussion on financial market development has assumed a new
urgency.
What are the key objectives of financial market development? From our point of view, the basic aim of
financial market development must be to aid economic growth and development. The primary role of
financial markets, broadly interpreted, is to intermediate resources from savers to investors, and
allocate them in an efficient manner among competing uses in the economy, thereby contributing to
growth both through increased investment and through enhanced efficiency in resource use.
The Reserve Bank has taken a proactive role in the development of financial markets, particularly over
the past decade and a half of overall economic policy reforms. There has been a complete
transformation of the money market, the government securities market, and the foreign exchange
market over this period. Development of these markets has been done in a calibrated, sequenced and
careful manner in step with those in other markets in the real economy. The sequencing has also been
informed by the need to develop market infrastructure, technology and capabilities of market
participants and financial institutions in a consistent manner. In a low income economy like ours, the
cost of downside risk is very high, so the objective of maintaining financial stability has to be constantly
kept in view as we develop financial markets. What I would like to do today is to briefly recount the
measures taken to develop various financial markets in India, document the outcomes and broadly
sketch out the direction of the way forward.
From the point of view of the central bank, developed financial markets are critical for effective
transmission of monetary policy impulses to the rest of the economy. Monetary transmission cannot
take place without efficient price discovery, particularly with respect to interest rates and exchange
rates. Deep and liquid financial markets contribute to efficient price discovery in various segments of
the financial market. Well-integrated markets improve efficacy of policy impulses by enabling quick
transmission of changes in the central bank's short-term policy rate to the entire spectrum of market
rates, both short and long-term, in the money, the credit and the bond markets. However, various
benefits emanating from the functioning of the financial markets depend critically upon the resilience of
various segments of the market to withstand shocks and the strength of the risk management systems
in place. In view of the critical role played by the financial markets in financing the growing needs of
various sectors of the economy, it is important that financial markets are developed further and
wellintegrated.
In recognition of the critical role of the financial markets, the initiation of the structural reforms in the
early 1990s in India also encompassed a process of phased and coordinated deregulation and
liberalisation of financial markets. Financial markets in India in the period before the early 1990s were
marked by administered interest rates, quantitative ceilings, statutory pre-emptions, captive market for
government securities, excessive reliance on central bank financing, pegged exchange rate, and
current and capital account restrictions. As a result of various reforms, the financial markets have
transited to a regime characterised by market-determined interest and exchange rates, price-based
instruments of monetary policy, current account convertibility, phased capital account liberalisation and
an auction-based system in the government securities market.
Excessive fluctuations and volatility in financial markets can mask the underlying value and give rise to
confusing signals, thereby hindering efficient price discovery. Accordingly, policy efforts have also
aimed at ensuring orderly conditions in financial markets. Furthermore, deregulation, liberalisation, and
globalisation of financial markets pose several risks to financial stability. Financial markets are often
governed by herd behaviour and contagion and excessive competition among financial institutions can
also lead to a race to the bottom. The East Asian crisis of the 1990s suggested that global financial
markets can exacerbate domestic vulnerabilities. Notwithstanding the conventional wisdom that
financial markets punish deviations from prudent policies, financial markets, at times, seem to tolerate
imprudent behaviour for a remarkable stretch of time, while reacting pre-maturely at other times
(Lipschitz, 2007). In recognition of these possible destabilising factors, while liberalising domestic
financial markets in India, appropriate prudential safeguards have also been put in place. Enhancing
efficiency, while at the same time avoiding instability in the system, has been the challenge for the
regulators in India (Reddy, 2004). This approach to development and regulation of financial markets
has imparted resilience to the financial markets.
From the point of view of the economy as a whole, while developing financial markets it is essential to
keep in view how such development helps overall growth and development. The price discovery of
interest rates and exchange rates, and the integration of such prices across markets helps in the
efficient allocation of resources in the real sectors of the economy. Financial intermediaries like banks
also gain from better determination of interest rates in financial markets so that they can price their
own products better. Moreover, their own risk management can also improve through the availability of
different varieties of financial instruments. The access of real sector entities to finance is also assisted
by the appropriate development of the financial market and the availability of transparent information
on benchmark interest rates and prevailing exchange rates. The approach of the Reserve Bank in the
development of financial markets has been guided by these considerations, while also keeping in view
the availability of appropriate skills and capacities for participation in financial markets both among
financial market participants and real sector entities and inpiduals.
The Reserve Bank's approach has therefore been one of consistent development of markets while
exercising caution in favour of maintaining financial stability in the system.
Money market
The Reserve Bank has accorded prime attention to the development of the money market as it is the
key link in the transmission mechanism of monetary policy to financial markets and finally, to the real
economy (Annex I). In the past, development of the money market was hindered by a system of
administered interest rates and lack of proper accounting and risk management systems. With the
initiation of reforms and the transition to indirect, market-based instruments of monetary policy in the
1990s, the Reserve Bank made conscious efforts to develop an efficient, stable and liquid money
market by creating a favourable policy environment through appropriate institutional changes,
instruments, technologies and market practices. Accordingly, the call money market was developed
into primarily an inter-bank market, while encouraging other market participants to migrate towards
collateralised segments of the market, thereby increasing overall market integrity.
In line with the objective of widening and deepening of the money market and imparting greater
liquidity to the market for facilitating efficient price discovery, new instruments, such as collateralised
lending and borrowing obligations (CBLO), have been introduced. Money market instruments such as
market repo and CBLO have provided avenues for non-banks to manage their short-term liquidity
mismatches and facilitated the transformation of the call money market into a pure inter-bank market.
Furthermore, issuance norms and maturity profiles of other money market instruments such as
commercial paper (CP) and certificate of deposits (CDs) have been modified over time to encourage
wider participation while strengthening the transmission of policy signals across the various market
ad hoc
segments. The abolition of Treasury Bills and introduction of regular auctions of Treasury Bills
paved the way for the emergence of a risk free rate, which has become a benchmark for pricing the
other money market instruments. Concomitantly, with the increased market orientation of monetary
policy along with greater global integration of domestic markets, the Reserve Bank's emphasis has
been on setting prudential limits on borrowing and lending in the call money market, encouraging
migration towards the collateralised segments and developing derivative instruments for hedging
market risks. This has been complemented by the institutionalisation of the Clearing Corporation of
India Limited (CCIL) as a central counterparty. The upgradation of payment system technologies has
also enabled market participants to improve their asset liability management. All these measures have
widened and deepened the money market in terms of instruments and participants, enhanced
transparency and improved the signalling mechanism of monetary policy while ensuring financial
stability.
These policy initiatives over time have led to the development of a relatively deep, liquid and vibrant
money market in the country. Activity in all the segments has increased significantly, especially during
the last three years. With the development of market repo and CBLO segments, the call money market
has been transformed into a pure inter-bank market from August 2005. A recent noteworthy
development is the substantial migration of money market activity from the uncollateralised call money
segment to the collateralised market repo and CBLO markets. Thus, uncollateralised overnight
transactions are now limited to banks and primary dealers in the interest of financial stability (Table 1).
Volatility in call rates has declined over the years, especially after the introduction of the Liquidity
Adjustment Facility (LAF). Under the LAF, the Reserve Bank sets its policy rates, i.e., repo and
reverse repo rates and carries out repo/reverse repo operations, thereby providing a corridor for
overnight money market rates. The weighted average overnight rate has largely moved within the
corridor set by LAF rates, barring some occasions, especially in recent months (Chart 1).
The operating framework of monetary policy has been the maintenance of overnight market rates
within an interest rate corridor defined by the floor of the reverse repo (absorption) rate and ceiling of
the repo (injection) rate. During periods of system wide excess liquidity, overnight rates tend to hug the
bottom of the corridor, while touching the ceiling during other periods of liquidity shortage, as might be
expected. Increased volatility in capital flows, tending to inject excess liquidity into the system, and in
government cash balances resulting from bunching of tax payments that suck liquidity out of the
system, have made the task of liquidity management somewhat more difficult over the past year.
Consequently, volatility in overnight rates has increased in recent months relative to previous years,
with overnight rates breaching both ends of the corridor.
Table 1 : Activity in Money Market Segments
(Rupees crore)
Average Daily Turnover # Outstanding Amount
Year Call Market Repo Collateralised Term Money Market - Total Commercial Certificates
Money (Outside the Borrowing and Money (2 to 5) Paper of Deposit
Market LAF)* Lending Obligation Market
(CBLO)
1 2 3 4 5 6 7 8
1997-98 22709 - - - 22709 1500 14296
1998-99 26500 - - - 26500 4770 3717
1999-00 23161 6895 - - 30056 7014 1908
2000-01 32157 10500 - - 42657 6751 1199
2001-02 35144 30161 - 195 65500 7927 949
2002-03 29421 46960 30 341 76752 8268 1224
2003-04 17191 10435 515 519 28660 7835 3212
2004-05 14170 17135 6697 526 38528 11723 6052
2005-06 17979 21183 20039 833 60034 17285 27298
2006-07 21725 33676 32390 1012 88803 21478 64954
# : Turnover is twice the single leg volumes in the case of call money and CBLO to capture
borrowing and lending both, and four times in case of market repo (outside LAF) to capture the borrowing and
lending in the two legs for a repo.
* : Liquidity Adjustment Facility.
After the adoption of the full-fledged LAF in June 2000, call rates, in general, witnessed a declining
trend up to 2004-05. The institution of LAF has also enabled the Reserve Bank to manage liquidity
more efficiently and reduce volatility in call rates. Volatility, measured by the coefficient of variation
(CV) of call rates, has declined significantly in the current decade as compared with that in the 1990s
(Chart 2), with some increase in 2006-07, as already noted.
BIS Review 51/2007
The reduction in bid-ask spread in the overnight rates indicates that the Indian money market has
become reasonably deep, vibrant and liquid. During April 2004-February 2007, the bid-ask spread
has varied within a range of -0.37 to +1.32 basis points with an average of 16 basis points and
standard deviation (SD) of 11 basis points (coefficient of variation being 68.8). Despite a higher degree
of variation, however, the bid-ask spread remained within the 2-SD band around the average during
most of the period (Chart 3).
As a result of various reform measures, the money market in India has undergone significant
transformation in terms of volume, number of instruments and participants and development of risk
management practices. In line with the shifts in policy emphasis, various segments of the money
market have acquired greater depth and liquidity. The price discovery process has also improved. The
call money market has been transformed into a pure inter-bank market, while other money market
instruments such as market repo and CBLO have developed to provide avenues to non-banks for
managing their short-term liquidity mismatches. The money market has also become more efficient as
is reflected in the narrowing of the bid-ask spread in overnight rates. The abolition of ad hoc Treasury
Bills and introduction of Treasury Bills auction have led to the emergence of a risk free rate, which acts
as a benchmark for the pricing of other money market instruments.
Government securities market
The Reserve Bank has actively pursued the development of the government securities market since
the early 1990s for a variety of reasons (Annex II). First, with the Reserve Bank acting as the debt
manager to the Government, a well-developed and liquid government securities market is essential to
ensure the smooth passage of Government's market borrowings to finance its deficit. Second, the
development of the government securities market is also necessary to facilitate the emergence of a
risk free rupee yield curve to serve as a benchmark for pricing other debt instruments. Finally, the
government securities market plays a key role in the effective transmission of monetary policy
impulses in a deregulated environment.
In order to foster the development of the government securities market, it was imperative to migrate
from a regime of administered interest rates to a market-oriented system. Accordingly, in the early
1990s, the Reserve Bank initiated several measures. First, it introduced the auction system for
issuance of government securities. While initially only yield-based multiple price auctions were
conducted, uniform price-based auctions were also employed during uncertain market conditions and
while issuing new instruments. Second, as the captive investor base was viewed as constraining the
development of the market, the statutory prescription for banks' investments in government and other
approved securities was scaled down from the peak level in February 1992 to the statutory minimum
level of 25 per cent by April 1997. As a result, the focus shifted towards the widening of the investor
base. A network of intermediaries in the form of primary dealers was developed for this purpose. Retail
participation has been promoted in the primary market (through a system of non-competitive bidding in
the auctions) as well as in the secondary market (by allowing retail trading in stock exchanges).
Simultaneously, the Reserve Bank also introduced new instruments with innovative features to cater to
perse market preferences, although the experience in this regard has not been encouraging.
Third, with the discontinuance of the process of unconstrained recourse by the Government to the
Reserve Bank through automatic monetisation of deficit and conversion of non-marketable securities
to marketable securities, the Reserve Bank gained more operational freedom. Fourth, in an effort to
increase liquidity, the Reserve Bank has, since the late 1990s, pursued a strategy of passive
consolidation of debt by raising progressively higher share of market borrowings through re-issuances.
This has resulted in critical mass in key maturities, and is facilitating the emergence of market
benchmarks. Fifth, improvement in overall macroeconomic and monetary management that has
resulted in lower inflation, lower inflation expectations, and price stability has enabled the elongation of
the yield curve to maturities upto 30 years. Finally, the Reserve Bank has also undertaken measures
to strengthen the technological infrastructure for trading and settlement. A screen-based anonymous
trading and reporting platform has been introduced in the form of NDS-OM, which enables electronic
bidding in primary auctions and disseminates trading information with a minimum time lag.
Furthermore, with the setting up of CCIL, an efficient settlement mechanism has also been
institutionalised, which has imparted considerable stability to the government securities market.
With the withdrawal from the primary market from April 1, 2006 in accordance with the FRBM (Fiscal
Responsibility and Budget Management Act) stipulations, the Reserve Bank introduced various
institutional changes in the form of revamping and widening of the coverage of the Primary Dealer
(PD) system to meet the emerging challenges. Other measures taken to deepen the market and
promote liquidity include introduction of "when issued" trading, "short selling" of government securities
and active consolidation of government debt through buy backs. Various policy initiatives taken by the
Reserve Bank over the years to widen and deepen the government securities market in terms of
instruments as well as participants have enabled successful completion of market borrowing
programmes of the Government under varied circumstances. In particular, a smooth transition to the
post-FRBM phase has been ensured.
ad hoc
The system of automatic monetisation through Treasury Bills was replaced with Ways and
Means Advances in 1997, because of which the Government resorted to increased market borrowings
to finance its deficit. Accordingly, the size of the government securities market has increased
significantly over the years (Chart 4).
The investor base for government securities, which was largely determined by mandated investment
requirements before reforms, has expanded with the voluntary holding of government securities.
Accordingly, the share of commercial banks has declined from 2004-05 (Chart 5).
The PD system was essentially conceived for institutions whose basic interest is not to hold securities
but to participate in the primary auctions with the intent to act as market makers in the secondary
market. PDs are responsible for ensuring the success of primary auctions. The presence of PDs in the
government securities market has brought about an element of dynamism, both in the primary and the
secondary segments. PDs have been actively participating in the auctions of government securities.
By providing continuous two-way quotes, PDs act as market makers in the secondary market. The
liquidity in the secondary market, in turn, lends support to the success of primary market operations.
The PD system has facilitated better distribution of primary auctioned stock while providing better
liquidity in the secondary market (Table 2). The decline in the share of PDs in the primary issuances in
the recent period needs to be seen in the context of increased bidding interest by insurance
companies, particularly in the long dated securities.
Table 2 : Role of Primary Dealers in the Government Securities Market
(Per cent)
Share of Government
Share in Primary Share in Turnover securities in Total
Year Subscription (Outright) Assets of PDs*
1 2 3 4
2001-02 65.0 27.7 79.8
2002-03 58.5 27.0 83.9
2003-04 51.5 23.9 82.2
2004-05 52.9 28.2 71.5
2005-06 40.4 31.1 60.9
2006-07 (P) 40.0 26.4 61.0
* At end-March.
Note: Data exclude devolvement but include MSS and Non-Competitive Bids.
One of the key issues in the development of the market for a better price discovery is liquidity of
securities. It was observed that, of the universe of a large number of outstanding securities, only a few
securities are actively traded in the secondary market. The Reserve Bank has been following a policy
of passive consolidation through re-issuance of existing securities with a view to enhancing liquidity in
the secondary segment of the government securities market. The share of re-issuances in the total
securities issued was 97.7 per cent during 2005-06. Active consolidation of government securities has
also been attempted under the debt buyback scheme introduced in July 2003, which is expected to be
more actively pursued now.
As a result of the developmental measures undertaken, the volume of transactions has increased
manifold over the past decade (Chart 6).
The significant drop in turnover in 2004-05 and 2005-06 could be due to a "buy and hold" tendency of
the participants other than commercial banks, particularly insurance companies, which now hold a
substantial portion of government securities, particularly those of longer maturities. The decline could
also be attributed to the asymmetric response of investors to the interest rate cycle. In the absence of
a facility of short selling in government securities, participants generally refrained from taking positions
which resulted in volumes drying up in a falling market (Chart 7).
To keep the markets liquid and active even during the bearish times, and more importantly, to give the
participants a tool to better manage their interest rate risk, intra-day short selling in government
securities was permitted among eligible participants, viz., scheduled commercial banks (SCBs) and
primary dealers (PDs) in February 2006. Subsequently, the short positions were permitted to be
carried beyond intra-day for a period of five trading days, effective January 31, 2007. To further
improve the liquidity in the government securities market, guidelines for trading in when issued "WI"
market were issued by the Reserve Bank in May, 2006. Trading in "WI" segment, which commenced
in August 2006, was initially permitted in reissued securities. It takes place from the date of
announcement of auction till one day prior to allotment of auctioned securities. The revised guidelines
extending "WI" trading to new issuances of Central Government securities on a selective basis were
issued in November 2006.
The Reserve Bank has followed a strategy of elongating the yield curve by issuing a fine blend of
longterm securities along with the short-term to suit the preference of both the issuer and the investor. With
the issuance of longer term securities, the yield curve on government securities has emerged over a
spectrum of 30 years, although the yield curve is not liquid at the longer end of the maturity (Chart 8).
Thus, various measures undertaken have led to a significant improvement in the functioning of the
government securities market. The primary market has attained a greater resilience, benefiting from
measures taken for the development of institutions and instruments. The functioning of the
government securities market since the mid-1990s indicates consistent increase in its size in tandem
with the growth in market borrowings of both the Central and the State Governments. Introduction of
the auction based system has improved the price discovery process. Reflecting the effectiveness of
various measures to develop the market, the turnover in the secondary market has increased manifold
over the years. The establishment of settlement and trading infrastructure has also led to increased
activity in the secondary market. The holding pattern of government debt shows some shift from banks
to non-banks, reflecting a progressive persification of the investor base. The yield curve on
government securities has emerged even as it is yet to become liquid at the longer end of the maturity.
Thus, the government securities market in India has witnessed a transition to an increasingly
broadbased market, characterised by an efficient auction process, an active secondary market and a liquid
yield curve. These developments have aided the smooth financing of government debt, of both the
central government and state governments, even when their fiscal deficits were high and rising. This
experience has enabled the greater recourse of state governments to market borrowing as mandated
by the Twelfth Finance Commission.
Foreign exchange market
The Indian foreign exchange market has witnessed far reaching changes since the early 1990s
following the phased transition from a pegged exchange rate regime to a market determined exchange
rate regime in 1993 and the subsequent adoption of current account convertibility in 1994 and
substantial liberalisation of capital account transactions (Annex III). Market participants have also been
provided with greater flexibility to undertake foreign exchange operations and manage their risks. This
has been facilitated through simplification of procedures and availability of several new instruments.
There has also been significant improvement in market infrastructure in terms of trading platform and
settlement mechanisms. As a result of various reform measures, liquidity in the foreign exchange
market increased by more than five times between 1997-98 and 2006-07 (Table 3).
In relative terms, turnover in the foreign exchange market was 6.6 times the size of India's balance of
payments during 2005-06 as compared with 5.4 times in 2000-01 (Table 4). With the deepening of the
foreign exchange market and increased turnover, income of commercial banks through such
transactions increased significantly. Profit from foreign exchange transactions accounted for more than
20 per cent of total profit of scheduled commercial banks in the last 2 years.
Table 3: Turnover in the Foreign Exchange Market
Turnover in US $ billion Share of spot turnover in per cent
Year Merchant Inter-bank Total Merchant Inter-bank Total
1 2 3 4 5 6 7
1997-98 210 1096 1305 57.6 50.3 51.5
1998-99 246 1057 1303 52.9 49.4 50.0
1999-00 244 898 1142 62.3 50.8 53.3
2000-01 269 1118 1387 65.2 45.2 49.1
2001-02 257 1165 1422 64.0 39.8 44.1
2002-03 325 1236 1560 57.9 42.7 45.9
2003-04 491 1628 2118 53.1 48.7 49.7
2004-05 705 2188 2892 48.2 50.5 50.0
2005-06 1220 3192 4413 45.0 52.7 50.6
2006-07 (P) 1787 4727 6514 46.2 54.2 52.0
(P): Provisional
BIS Review 51/2007
Table 4: Size of the Foreign Exchange Market
Year Foreign Exchange BoP size Col. 2
Market-Annual ($ billion) over Col. 3
Turnover ($ billion)
1 2 3 4
2000-01 1387 258 5.4
2001-02 1422 237 6.0
2002-03 1560 267 5.8
2003-04 2118 362 5.9
2004-05 2892 481 6.0
2005-06 4413 664 6.6
2006-07 6514 N.A. N.A.
Efficiency in the foreign exchange market has also improved as reflected in the decline in bid-ask
spreads. The bid-ask spread of Rupee/US$ market has almost converged with that of other major
currencies in the international market. On some occasions, in fact, the bid-ask spread of Rupee/US$
market was lower than that of some major currencies (Chart 9).
The EMEs' experience, in general, in the 1990s has highlighted the growing importance of capital
flows in determining the exchange rate movements as against trade flows and economic growth in the
1980s and before. In the case of most developing countries, which specialise in labour-intensive and
low and intermediate technology products, profit margins in the highly competitive markets are very
thin and vulnerable to pricing power by large retail chains. Consequently, exchange rate volatility has
significant employment, output and distributional consequences. Foreign exchange market conditions
have remained orderly in the post-1993 period, barring occasional periods of volatility (Chart 10). The
Indian approach to exchange rate management has been to avoid excessive volatility. Intervention by
the Reserve Bank in the foreign exchange market, however, has been relatively small compared to
total turnover in the market.
The exchange rate policy in recent years has been guided by the broad principles of careful
monitoring and management of exchange rates with flexibility, without a fixed target or a
preannounced target or a band, coupled with the ability to intervene, if and when necessary. The overall
approach to the management of India's foreign exchange reserves takes into account the changing
composition of the balance of payments and endeavours to reflect the "liquidity risks" associated with
different types of flows and other requirements. Illustratively, the Indian rupee exhibited two-way
movements during 2006-07 moving in a range of Rs.43.14-46.97 per US dollar. The rupee initially
depreciated against the US dollar during the year, reaching Rs.46.97 on July 19, 2006, reflecting
higher crude oil prices, FII outflows and geo-political risks in the Middle East region. The rupee,
however, strengthened thereafter on the back of moderation in crude oil prices, revival of FII inflows
and weakness of the US dollar in the international markets. The rupee appreciated further to reach Rs.
40.59 per US dollar on May 7, 2007 due to increased supply of dollars in the market. Thereafter,
however, the rupee depreciated to Rs. 40.85 per US dollar on May 16, 2007. At this level, the rupee
appreciated by 6.7 per cent over end-March 2007 and 9.2 per cent over end-March 2006. Against the
Euro, the rupee appreciated by 4.7 per cent over end-March 2007, but depreciated by 2.4 per cent
over end-March 2006. The real effective exchange rate (REER) of the Indian rupee (six-currency
trade-based weights) at 112.2 as on April 18, 2007 appreciated by 12.2 per cent over the base
199394; over 2000-01 the appreciation is by 9.6 per cent (Chart 11).
Apart from the spot segment, the foreign exchange market in India trades in derivatives such as
forwards, swaps, and options. The typical forward contract is for one month, three months, or six
months, with three months being the most common. Forward contracts for longer periods are not as
common because of the great uncertainties involved. A swap transaction in the foreign exchange
market is a combination of a spot and a forward in the opposite direction. Foreign exchange swaps
account for the largest share of the total derivatives turnover in India, followed by forwards and options
(Table 5). Options have remained insignificant despite being in existence for three years. With
restrictions on the issue of foreign exchange swaps and options by corporates in India, turnover in
these segments (swap and options) essentially reflects inter-bank transactions.
Table 5: Derivatives Turnover in India in nominal/notional
amounts
(US $ billion)
Product 2000-01 2005-06 2006-07
(Up to
Novem