Development of Viable Capital Markets -- The Indian Experience
by Dr. Viral V. Acharya, Deputy Governor, Reserve Bank of India (RBI)1
1. Introduction
1.1 Capital markets play a crucial role in the economic development of a country.
They provide financial resources required for the long-term sustainable development
of the economy. Development of viable capital markets is therefore considered an
important element in the macro-financial policy toolkit, including for objectives such
as financial stability and the transmission of monetary policy.
1.2 The Committee on Global Financial System (CGFS), which meets at the Bank for
International Settlements (BIS), constituted a Working Group in 2018-19 to examine
global trends in capital market development, identify various factors (legal,
institutional, structural and conjunctural) that foster the development of robust capital
markets, and consider the role of policy including prudential measures. The Working
Group, co-chaired by the People's Bank of China (PBOC, Dr. Li Bo) and the Reserve
Bank of India (RBI, Dr. Viral V. Acharya), focussed on issues primarily related to the
development of markets in bond and equity securities2. While these issues are
arguably of greater relevance to emerging market economies, they were found to be
of significant interest even for advanced economies.
1.3 The CGFS Report identified the drivers of capital market development and
categorised them into two types:
(i) drivers which create an enabling environment for financial development, and
(ii) drivers which are more capital market specific.
1.4 Drivers which create an enabling environment as identified in the CGFS Report
include:
- macroeconomic stability,
- broad respect for market autonomy,
- fair and efficient legal and judicial systems, and
- an efficient regulatory regime that creates conditions favourable for
financial contracts.
1.5 Drivers which are capital market specific as identified in the CGFS Report
include:
- easy access to high-quality material information,
- diversity in the investor base,
- efficient market ecosystem for trading and robust market infrastructures,
- openness towards international investors while maintaining macro-
economic stability, and
- markets for hedging and funding securities.
1.6 The CGFS Report made six broad policy recommendations:
(i) promoting greater market autonomy;
(ii) strengthening legal and judicial systems for investor protection;
(iii) enhancing regulatory independence and effectiveness;
(iv) increasing the depth and diversity of the domestic institutional investor
base;
(v) opening up capital markets internationally in a bi-directional manner; and
(vi) developing complementary markets for derivatives, repo transactions
and securities lending.
1.7 Policy initiatives in India have been largely in sync with the findings and
recommendations of the CGFS Report. I shall discuss these and future policy
directions after providing a brief overview of the Indian capital markets. While the
scope of the CGFS Report is the entire capital market, I will largely confine this
speech to the markets regulated by the Reserve Bank, viz., interest rate markets and
(to a lesser extent) foreign exchange markets.
2. Overview of the Indian capital markets
2.1 Indian capital markets have a history of more than a century. However, they
remained largely inactive till the 1970s. Partial liberalisation of the economy and pro-
capital market policies during the 1980s infused some life into the markets, but it was
only the economic liberalisation of the 1990s that provided a lasting impetus. Today,
segments of India's capital markets are comparable with counterparts in many of the
advanced economies in terms of efficiency (price discovery), tradability (low impact
cost), resilience (co-movement of rates across product classes and yield curves),
and stability. In particular, their ability to withstand several periods of stress, notably
the Asian financial crisis in 1997-98, the global financial crisis in 2007-09 and the
"taper tantrum" episode in 2013, is a sign of their increasing maturity.
2.2 In terms of size, all the major segments of the capital market, viz., Central
Government securities (G-Sec) market, market for State Development Loans (SDL),
corporate bond market and equity market -- the so called "cash markets" -- have
experienced consistent growth during the past few decades in terms of primary
issuance, market capitalisation (for equity market) and trading volumes in the
secondary market. Equity market remains the largest segment, even as G-Sec, SDL
and corporate bond markets have grown steadily (Chart 1).
Chart 1: Growth in outstanding stock of the Indian capital markets
900 2,500
816
800
2,202
2,000
700
600
1,366
1,500
500 447
billion billion
478
400
1,000
405
USD USD
300
176
200
500
100
115
- -
2009-102010-112011-122012-132013-142014-152015-162016-172017-182018-19
G-Sec SDL Corporate Bonds Equity Market Capitalisation (RHS)
Source: Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI)
2.3 Growth of the Government Securities market: A streamlined, transparent and
market-based primary issuance process has underpinned the development of the
government securities markets, both central government securities (G-Secs) and
state government securities (SDLs). In the primary G-Sec markets, issuances are
made as per a half-yearly pre-announced calendar. The calendar specifies the
amount, tenor and issuance dates. The tenor of the G-Secs goes up to 40 years. G-
Secs are mostly fixed-coupon bonds, although instruments such as inflation-linked
bonds, capital-indexed bonds, floating-rate bonds and bonds with embedded options
are also issued. Currently, all issuances are done through weekly auctions.
Issuances are supported by Primary Dealers (PDs) who fully underwrite the issue.
Auctions are conducted through both competitive bidding [for all residents, Foreign
Portfolio Investors (FPIs) and Non-Resident Indians (NRIs)], which determines the
market-clearing price, and non-competitive bidding (for retail investors, largely),
which receives the allotted securities at the market-clearing price. More than 90% of
the issuances are done through re-opening of existing securities which has
contributed significantly to market liquidity by spreading out ownership across a large
number of investors. The Reserve Bank has also introduced "when-issued" segment
for the G-Sec market since 20063.
The profile of both G-Secs and SDLs in terms of stock and flow characteristics is
shown in Tables 1 and 2. The weighted average coupon on G-Secs has remained
stable across interest rate cycles imparting stability to the debt profile as the average
maturity of issuance (more than 10 years) is one of the longest globally, helping limit
the rollover risk for the central government. SDL issuance has increasingly formed a
much greater share of issuance relative to the G-Secs, rising from around 25% of
issuance in 2013-14 to around 45% in 2017-18.
Table 1: Characteristics of Central Government borrowings (G-Secs)
Year Issued during the Year Outstanding stock
Weighted Weighted
Weighted Average Weighted Average
Average Average Maturity
Maturity (years) Coupon (%)
Yield (%) (years)
2013-14 8.4 14.2 8.0 10.0
2014-15 8.5 14.7 8.1 10.2
2015-16 7.9 16.0 8.1 10.5
2016-17 7.2 14.8 8.0 10.7
2017-18 7.0 15.0 8.0 10.7
7.8 14.7 7.8 10.4
2018-19
Source: Annual Report of Reserve Bank of India (2017-18) and Database of Indian Economy (DBIE),
Reserve Bank of India
Table 2: Issuance profile of Government borrowings (in US $ billion)
Central Government (G-Secs) State Governments (SDLs)
Year
Outstanding stock at Outstanding stock at
Gross issuance Gross issuance
(end-March) (end-March)
2013-14 90 609 31 174
2014-15 91 648 36 199
2015-16 85 674 41 243
2016-17 80 754 56 321
2017-18 91 795 63 346
2018-19 83 837 70 404
Source: Database of Indian Economy (DBIE), Reserve Bank of India
2.4 Liquidity of the G-Sec market: Liquidity in the secondary market for
government securities has noticeably improved over the past decade (Chart 2). The
average daily volume in the G-Sec and SDL markets has remained higher than that
of corporate bond and equity cash markets. The liquidity in G-Secs is, however,
mainly concentrated in a few benchmark securities, particularly the 10-year
benchmark, and SDLs are relatively less liquid than the G-Secs, yielding typically 50-
75 basis points more than the G-Secs in terms of yield at the 10-year tenor. The
average bid-ask spread for liquid securities in the G-Sec market has remained less
than a basis point during the last few years (Chart 3). Strikingly, bid-ask spread as
well as the price impact of trade for the 10 year Indian G-Sec benchmark are
comparable to or lower than those for most of the advanced economies of the world
including the US, the UK, France and Germany (Chart 4).
Chart 2: Secondary market liquidity in terms of average daily volume
12.0
10.0
8.0
billion
6.0
5.6
USD
4.0
2.7
2.6
2.5
2.0
0.7
0.4
-
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
G-Sec (including SDLs and T-bills) Corporate Bonds Equity volumes
Source: Clearing Corporation of India Limited (CCIL), Securities and Exchange Board of India (SEBI)
There are several proximate drivers of this liquidity of the Indian G-Sec market:
(i) Regular issuance of the 10-year benchmark has concentrated trading interest in
this segment of the yield curve. Efforts are now being made to regularise issuance of
benchmark securities at shorter maturities (2 and 5 years).
(ii) Secondary market transactions are predominantly (around 80%) conducted in an
anonymous electronic order matching system (NDS-OM) which is unique in the
world for debt trading. While the remaining transactions happen over-the-counter
(OTC) outside the NDS-OM4, they are nevertheless reported to the NDS-OM
platform.
(iii) Near real-time dissemination of trade information publicly accessible on the
website of the Clearing Corporation of India (CCIL) ensures price transparency.
(iv) Settlement is guaranteed by the CCIL and takes place through Delivery versus
Payment (DvP) mechanism on T+1 basis. Guaranteed settlement implies there is no
risk to investors from each other of delivery failures.
(v) Finally, enabling of short-selling facilitates a two-way interest adding to activity
and price discovery in the market.
Chart 3: Average bid-ask spread for liquid Government Securities
1.2000
1.0000
0.8000
0.6489
points
0.6000
Basis
0.4000
0.2000
0.2618
0.0000
Apr/15 Oct/15 Apr/16 Oct/16 Apr/17 Oct/17 Apr/18 Oct/18 Apr/19
Jun/15 Jun/16 Jun/17 Jun/18
Aug/15 Dec/15 Feb/16 Aug/16 Dec/16 Feb/17 Aug/17 Dec/17 Feb/18 Aug/18 Dec/18 Feb/19
Source: Clearing Corporation of India Limited (CCIL)
2.5 Growth and liquidity of the corporate bond market: The corporate bond
market has grown over the years to a size of USD 447 billion of outstanding stock as
at the end of March 2019, clocking an annualised growth rate of 13.5% during the
last four years. Issuances are predominantly through private placement and
dominated by high credit issuers. In 2018-19, 79% of the issuances were by entities
rated 'A' or higher. Secondary market trading has also picked up in the recent past,
with trading volumes rising from USD 170 billion in FY 2014-15 to USD 267 billion in
2018-19. Trading is entirely OTC with trades settled bilaterally and reported to stock
exchanges.
Chart 4: 10-year benchmark G-Sec liquidity in different countries
80 40
points)
points)
60 30
basis
basis
in
in
40 20
trade2
of
20 10
spreads1
impact
0 0
(Bid-ask
ID TR MY NO CN MX TH IT JP KR BR ZA FR AU DE CA US GB IN
(Price
2
AEs EMEs
1
Average of daily bid-ask spreads in May 2018, defined as: (ask price - bid price) / bid price * 100, i.e., the
return cost of executing a round-trip transaction in the bond.
2
Based on USD 10 million transaction amount using estimates from the Bloomberg Liquidity Assessment
(LQA) function, Jun 2018.
Source: Establishing Viable Capital Markets, CGFS Papers No 62
2.6 Recent developments in the corporate bond market: Consistent investment
interest by domestic institutions like mutual funds, pension funds and insurance
funds as well as foreign portfolio investors (FPIs) has helped in developing the
corporate bond market. Tri-party repo ("sale and repurchase") in corporate bonds
has been introduced by the exchanges recently with a view to encourage trading
interest. Implementation of the Insolvency and Bankruptcy Code (IBC) starting
December 2016 is expected to go a long way in improving participation in the
corporate bond market by strengthening the protection of creditor rights, in a market
presently characterised by one of the lowest recovery rates (25%) in the world (Chart
5). With greater confidence in time-bound and efficient resolutions under the IBC,
foreign investors are likely to explore investment in sub-investment grade and
distressed corporate assets.
Chart 5: Corporate bond market size and recovery rate
Recovery rate in cents on the dollar from the World Bank Doing Business database
NFC= Non-financial corporate
Source: Establishing Viable Capital Markets, CGFS Papers No 62
2.7 Investor Base: There has been a conscious and continuous effort by the
Reserve Bank to expand the investor base and thereby liquidity of the markets it
regulates, while preserving financial stability. The investor base for G-Secs, for
instance, has expanded over the past decade in terms of an increase in the share of
holdings by insurance companies and corporates and a corresponding decrease in
the share of holding by commercial banks (Chart 6). In parallel, calibrated access for
global investors through the FPI route is helping broaden the investor base, while
also bringing in diversity of trading views and strategies.
Chart 6: Holding pattern for Government Securities (% held by each investor group)
Commercial Banks
Mar 2007
Non-Bank PDs
1.9
6.5
Insurance Companies
6.7
Mutual Funds
0.2
4.8
Co-operative Banks
0.7
Financial Institutions
3.0
0.4
49.7
Corporates
Foreign Portfolio
Investors
Provident Funds
RBI
26.2
Others (Including State
0.4
Governments)
Commercial Banks
Dec 2018
6.6
Non-Bank PDs
13.8 Insurance Companies
Mutual Funds
40.5 Co-operative Banks
5.5
Financial Institutions
Corporates
3.6
Foreign Portfolio
1.0
1.0
Investors
2.4 Provident Funds
0.6
RBI
0.3
Others (Including State
24.6
Governments)
Source: Database of Indian Economy (DBIE), Reserve Bank of India
2.8 Funding and Derivatives Markets: A necessary condition for the development
of capital markets is the existence of funding and securities lending markets as well
as derivative markets for risk transfer. Repo funding in Indian G-Secs is fairly deep
with average daily volume of about USD 20 billion (Chart 7). In case of interest rate
derivatives, there is reasonable liquidity in Interest Rate Futures (IRF) and Overnight
Indexed Swaps (OIS) markets5. Much of the recent increase in activity can be
attributed to the Reserve Bank allowing non-residents to participate in interest rate
derivatives markets for both hedging and trading purposes.
Chart 7: Average daily volume in G-Sec and corporate bond repo
30 0.08
0.07
0.07
25
25
0.06
20
0.05
16
billion billion
15 0.04
0.03
USD USD
10
0.02
5
0.01
0.00
0 0.00
FY FY FY FY FY FY FY FY FY FY
0910 1011 1112 1213 1314 1415 1516 1617 1718 1819
Repo/TREPS* in G-Sec Corporate Bond repo (RHS)
6
* Triparty Repo System (TREPS)
Source: Clearing Corporation of India Limited (CCIL)
3. Policy initiatives in India
What has enabled the growth of Indian capital markets to reach this stage? To
answer this, I will now discuss the policy measures taken in India vis-à-vis the
findings and recommendations of the CGFS Report.
3.1 Enabling environment
3.1.1 Macroeconomic Stability
India's GDP growth has been one of the highest among large economies during the
last decade and half (Chart 8). Double digit inflation of few years prior to the "taper
tantrum" episode has been tamed, facilitated by a shift by the Reserve Bank in 2016
5
An Overnight Index Swap (OIS) is an interest rate swap agreement where a fixed rate is swapped
against a pre-determined published index of a daily overnight reference rate for an agreed period.
6
Triparty repo in G-Secs went live on November 05, 2018. In tri-party repo, a third party acts as a
central counterparty between the two originating parties of a repo transaction. Currently, the Clearing
Corporation of India Ltd. (CCIL) acts as the "triparty agent" for the G-Secs, while the Bombay Stock
Exchange (BSE) and the National Stock Exchange (NSE) operate as triparty agents for corporate
bonds.
to flexible inflation targeting with a headline target of 4% (+/- 2%) for the Monetary
Policy Committee (MPC). High levels of inflation make holdings of financial assets
economically unattractive relative to non-financial assets such as housing and gold.
The important reform of flexible inflation targeting, helped by low oil prices and food
supply management, has kept the headline inflation under control during the last 5
years, relative to the MPC's mandated target (Chart 9). This way, two preconditions
of macroeconomic stability -- stable growth and low inflation -- necessary for
financialisation of savings and capital market development are now in place in India.
Chart 8: Trends in GDP growth in India
9.00%
7.9%
8.00%
6.8%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
Note: GDP at constant prices with base year 2011-12
Source: Database of Indian Economy (DBIE), Reserve Bank of India
Chart 9: Trends in inflation in India
18.0
[VALUE]%
16.0
14.0
12.0
10.0
8.0 6.6%
Percent
6.0
[VALUE]%
4.0
2.0
Apr/07 Oct/07 Apr/08 Oct/08 Apr/09 Oct/09 Apr/10 Oct/10 Apr/11 Oct/11 Apr/12 Oct/12 Apr/13 Oct/13 Apr/14 Oct/14 Apr/15 Oct/15 Apr/16 Oct/16 Apr/17 Oct/17 Apr/18 Oct/18 Apr/19
Note: Data till Apr-14 is based on Industrial Worker - General Index with base year 2001 and
thereafter New CPI - Combined with 2012 as base year
Source: Database of Indian Economy (DBIE), Reserve Bank of India
3.1.2 Promoting market autonomy
a. Rationalising regulatory guidelines and procedures
In active coordination with the government and other financial market regulators, the
Reserve Bank has undertaken a series of reforms and rationalisation of existing
policies. These measures also seek to ensure financial stability and instil confidence
among stakeholders. Some important examples include:
(i) Liberalising the process for innovation of new products;
(ii) Moving away from a prescriptive approach to a principle-based regulatory
approach;
(iii) Minimising interference in the market process by eschewing ad-hoc
'approvals'; and,
(iv) Attempting to achieve comprehensive market regulations by addressing
gaps, in particular, by issuing market abuse regulations and benchmark
regulations, as well as regulating trading platforms.
b. Development of financial market institutions and infrastructure
A well-developed and reliable infrastructure is a prerequisite for safe and efficient
functioning of financial markets. Acknowledging this principle, the Reserve Bank has
taken several steps to put in place an effective infrastructure in the markets it
regulates, the salient steps being:
(i) Introduction of an anonymous trading platform for G-Sec called the
Negotiated Dealing System-Order Matching (NDS-OM);
(ii) Introduction of Legal Entity Identifier code (LEI) for OTC derivatives
markets as well as non-derivatives markets;
(iii) Development of a foreign exchange trading platform (Fx-Retail) aimed at
bringing down transactions costs for retail users (August 2019); and,
(iv) Constituting an independent financial benchmark administrator, viz., the
Financial Benchmarks of India Ltd. (FBIL).
c. Macro-prudential management of investment restrictions for domestic and
foreign investors
It has been a constant endeavour of the Reserve Bank to rationalise, and wherever
consistent with macro-prudential objectives, to relax restrictions in the form of
investment limits imposed on the market participants:
(i) The Reserve Bank has reduced the Statutory Liquidity Requirement (SLR)
stipulation on the minimum percentage of Net Demand and Time Liabilities
(NDTL) to be held in G-Secs and SDLs by banks in a calibrated way
(Chart 10) from close to 40% in 1990 to below 20% at present. This
important relaxation has resulted in a greater flexibility for banks in their
investment decisions and added to the diversity of investor base in G-Secs
and SDLs (Chart 6) -- which, in turn, have aided efficient pricing of these
bonds.
Chart 10: Reduction in the Statutory Liquidity Ratio (SLR) investment for banks
40.00
[VALUE]%
35.00
G-secs
in
in
30.00
held
be
25.00
to
19.25%
NDTL 20.00
of
%
15.00
SDLs
Minimum and
01-09-1990 01-11-1991 01-01-1993 01-03-1994 01-05-1995 01-07-1996 01-09-1997 01-11-1998 01-01-2000 01-03-2001 01-05-2002 01-07-2003 01-09-2004 01-11-2005 01-01-2007 01-03-2008 01-05-2009 01-07-2010 01-09-2011 01-11-2012 01-01-2014 01-03-2015 01-05-2016 01-07-2017 01-09-2018
Source: Database of Indian Economy (DBIE), Reserve Bank of India
(ii) The Reserve Bank has been calibrating access for Foreign Portfolio
Investors (FPIs) in debt markets to provide them greater latitude in
managing their portfolios in terms of increased FPI investment limits
(Charts 11 and 12) as well as expanded eligibility of instruments and tenor
for FPI investments.
(iii) Recently, the Reserve Bank has introduced the Voluntary Retention Route
(VRR) scheme to relax the macro-prudential restrictions for FPIs that are
willing to retain a significant portion of their investments in the country for a
minimum retention period (presently three years).
Chart 11: FPI investment in G-Secs vis-à-vis limit
50
49
45
40
35
30
27
billion
25
20
13
USD
15
10
1050
01/03/2012 01/07/2012 01/11/2012 01/03/2013 01/07/2013 01/11/2013 01/03/2014 01/07/2014 01/11/2014 01/03/2015 01/07/2015 01/11/2015 01/03/2016 01/07/2016 01/11/2016 01/03/2017 01/07/2017 01/11/2017 01/03/2018 01/07/2018 01/11/2018 01/03/2019
FPI investment Upper limit
Source: National Securities Depository Limited (NSDL), Clearing Corporation of India Limited (CCIL)
Chart 12: FPI investment in corporate debt vis-à-vis limit
50
45
44
41
40
35
31
30
billion
25
20
19
USD
15
1050
2012 2013 2014 2015 2016 2017 2018 2019
FPI investment Upper limit
Source: National Securities Depository Limited (NSDL)
3.1.3 Strengthening the legal and regulatory framework for investor protection
One of the most critical building blocks of market infrastructure is a proper legal
framework which ensures investor protection by acting as a deterrent to market
abuse and malpractices. In India, the Public Debt Act (1944), the Securities Contract
Regulation Act (1956) and the Government Securities Act (2006) govern the
formalisation of issuance and transfer of securities. In parallel, the Reserve Bank of
India Act (1934) confers powers on the Reserve Bank to regulate money,
derivatives, repo and government securities markets. With the Insolvency and
Bankruptcy Code (IBC) (December 2016), the legal framework for financial
regulation is also moving closer to being comprehensive and effective in the context
of non-financial corporate borrowers. However, the lack of resolution framework for
non-bank financial entities remains a crucial gap that deserves prompt attention of
the authorities.
3.2 Capital market specific drivers
Let me now turn to some of the other important drivers of market development in
India and also highlight some critical areas for improvement.
3.2.1 Disclosure regime
As per the cross-country survey findings of the CGFS Report, proper and timely
disclosure by the issuers in corporate bond market is a prerequisite for gaining
investors' confidence in this market. Conversely, lack of adequate disclosures raises
the financing costs of corporates, especially sub-investment grade ones, and keeps
the capital markets small. Recognising this, regulators in India have emphasised and
mandated high quality and timely disclosures by issuers. However, a few instances
of recent defaults in commercial paper and corporate bond markets have raised
concerns about the quality of disclosures, even for investment-grade firms. These
concerns are worthy of careful scrutiny and assessment relative to the best
international practices to help fine-tune standards for the timely disclosure of default-
relevant information by corporates.
3.2.2 Deepening the domestic institutional base
Expanding the investor base leads to increasing diversity in the market (see section
2.7). Efforts in this direction need to be sustained, with a particular focus on the
domestic institutional investor base. Improving pension and insurance coverage for
households can be a priority as it not only leads to social welfare outcomes, but also
leads to a stronger and more stable investor base for capital markets. Better
financialisation of household savings could be a catalyst for retail participation in
markets, in turn providing a boost to collective investment vehicles such as mutual
funds and alternative investment funds (AIFs).
3.2.3 Bi-directional opening of markets to international participation
One of the key drivers of market development recognised in the CGFS Report is
opening up of the market to foreign participants although it entails managing global
spillover risks. The Reserve Bank has taken calibrated steps in opening up its
regulated markets to foreign participants as discussed earlier and also allowed
domestic players to participate in overseas markets:
(i) In consultation with the government, the Reserve Bank has decided to
permit offshore trading and settlement of G-Secs through International
Central Securities Depositories (ICSD) for non-residents who do not want
to undergo the domestic FPI registration procedure.
(ii) The recently issued draft of regulations for hedging currency risk embodies
many of the drivers identified by the CGFS report -- product innovation,
opening up markets to non-residents and simplified hedging guidelines
which offer greater flexibility to users.
(iii) Similarly, in March 2018, the Reserve Bank freed up overseas hedging by
residents of commodity price risk and freight risk overseas. Residents
were permitted to hedge both direct and indirect commodity risk through
specified instruments. For direct exposure, all price risk on all commodities
is now permitted to be hedged overseas, while for indirect exposure,
residents can hedge overseas the price risk on industrial metals only.
Further, revised directions treat risks acquired from domestic and cross-
border transactions at par.
To manage the global spillover risks arising from such reforms, prudential limits have
been in place alongside most of these reforms to ensure consistency with the overall
state of capital account liberalisation for India and anchor macro-prudential risks at
manageable levels.
3.2.4 Developing complementary markets
Deep and liquid complementary markets like repo and derivatives play a crucial role
in the growth of the cash markets as they help investors in funding and hedging.
Over the past few years, the Reserve Bank has taken measures to help develop
repo markets for both Government securities and corporate bonds. Introduction of tri-
party repo (August 2017) has been a success for the G-Sec market; however, tri-
party repo is yet to pick up in the corporate bond market. Similarly, securities lending
("market repo") works well for G-Secs although wider participation (especially by
large holders of G-Secs like mutual funds, insurance companies and pension funds)
is required to avoid occasional episodes of excessive volatility in borrowing costs. All
these regulatory measures have resulted in a consistent growth in liquidity in the
repo markets.
To boost derivatives markets, efforts are required in encouraging better risk
management by domestic institutions, especially banks. With the untapped interest
rate derivatives market set for a pickup in the risk management activity of banks and
non-banks, the role of complementary markets will strengthen in the years to follow.
3.3 Other recent initiatives
Let me conclude by enumerating four of the important initiatives underway to
develop Indian capital markets further:
a. Task Force on Offshore Rupee Markets
The Reserve Bank constituted a Task Force in February 2019 to examine in depth
issues relating to the offshore Rupee markets and recommend appropriate policy
measures to align incentives for non-residents to gradually move to the domestic
market for their hedging requirements and also to ensure the stability of the external
value of the Rupee. The Report of the Task Force is due by mid-July 2019.
b. Internal Working Group on Market Timings
The Reserve Bank has set up an Internal Working Group on Market Timings which
will comprehensively review the timings of various markets that are under the
purview of the Reserve Bank, and will assess the necessary payment and settlement
infrastructure that can support co-ordinated timings across these markets. The
Working Group's Report, after submission, will be released for public feedback.
c. Task Force on the Development of Secondary Market for Corporate Loans
The Reserve Bank has constituted a Task Force on the Development of Secondary
Market for Corporate Loans. It will suggest required policies for facilitating the
development of a secondary market in corporate loans, including loan transaction
platform for stressed assets, creation of a loan contract registry, its ownership
structure and related protocols such as the standardization of loan information,
independent validation and data access. The Report of the Task Force is due by the
end of August 2019.
d. Committee on the Development of Housing Finance Securitisation Market
The Reserve Bank constituted this committee to assess the state of housing finance
securitisation markets in India; study the best international practices as well as
lessons learnt from the global financial crisis; and propose measures to further
develop these markets in India by identifying critical steps required such as, inter
alia, definition of conforming mortgages, mortgage documentation standards, digital
registry for ease of due diligence and verification by investors, avenues for trading in
securitised assets, etc. The Report of the Committee is due by the end of August
2019.
In summary, it should be clear that while Indian capital markets have evolved
steadily to a stage of long-run viability, the potential for developing and strengthening
them further is limitless...
"Let us, then, be up and doing,
With a heart for any fate;
Still achieving, still pursuing,
Learn to labour and to wait."
-- A Psalm of Life by
Henry Wadsworth Longfellow
(1807-1882)