borrowing into foreign exchange liability may lead to speculative trades in the absence of underlying risk exposures. however, this facility has been in existence for a decade and has supported distribution of foreign currency risks within the indian market without increasing the overall external debt. such a facility may come handy for a corporate, especially the exporters, having future foreign exchange receivables. the foreign exchange liability position assumed through fx swap may match with the foreign exchange receivables and provide the benefit of hedging. the issue is should such swaps be limited to only companies which have potential forex exposures. the road ahead 63. on the anvil is the introduction of credit default swaps. we are at an advanced stage of introducing other currency pairs for currency futures and are examining the issue of allowing plain vanilla currency options in consultation with sebi. 64. broadly speaking, the mandate for financial sector development should ideally derive from the regulatory assessments for each market. it has been clearly evidenced during the crisis that financial sector development per se cannot be an objective in itself. it needs to be pursued in the broader context of financial stability and has to necessarily correspond to the level of maturity of the financial system and the needs of the real economy. reforming financial markets involves improving access to simple, transparent, and easy - to - understand products. increasing complexity does not facilitate the market mechanism. the purpose of financial instruments is to transfer risk to those that understand these risks, not to hide or camouflage them. regulatory comfort and assessment should therefore be a critical determinant in pursuing financial reforms. 65. in regard to derivatives, we have both otc and exchange traded instruments for currency and interest rates. otc markets in india are well regulated, unlike many other jurisdictions, to address issues of leverage and customer appropriateness and suitability. only otc contracts where one party to the transaction is a rbi regulated entity is considered legally valid. suitable reporting and post trade clearing and settlement mechanisms are being further strengthened. given the incentive structures of these market, convergence of regulatory frameworks for otc and exchange traded markets cannot be an end in itself under present circumstances, though it is a long term goal. 66. the development of markets is also influenced by tax policies. debt instruments for instance do not enjoy tax exemptions of the nature enjoyed by equity instruments whether on income or capital gains. mutual funds fixed income products enjoy certain tax examptions not available to banks. but this is outside the regulatory purview. however

term basis. the term money market continues to remain dormant with low turnover despite several initiatives taken by the reserve bank, mainly reflecting the inability of the market participants to take a medium - term view on interest rates and liquidity, corporates ’ continued preference for cash credit and other modes of loan disbursements. however, the cd market is active and reflects the unsecured term money market rates. 35. rbi has addressed the issue of vulnerabilities arising from excessive intra financial sector activity by limiting the unsecured overnight market to banks and primary dealers and imposing limits on unsecured borrowing and lending in overnight markets as also by limiting the gross interbank liabilities. 36. on the market infrastructure side, over the years, the collateralised segment of money market has assumed increasing importance for the entire gamut of market players including non - banks without engendering financial instability. all collateralized trades including market repos are settled through a ccp. these developments have contributed to the increased transparency and liquidity in these markets and imparted stability to the financial markets. 37. on the regulatory front, the gap that existed in the case of ncds with maturities less than one year has received the regulatory attention. non convertible debentures of maturity of less than one year are being issued with innovative features such as, interest rates linked to overnight rate, american style put / call optionality, which imparts demand liability character to these instruments. further, the innovative features and the high amount of issuance of such instruments pose systemic risks. the suggestion of the market participants in expanding the eligible entities that can act as debenture trustees for the issuance of ncds with less than one year maturities is being examined by the reserve bank. however, the suggestion for relaxing the minimum tenor of these ncds from the proposed tenor of 90 days to 7 days cannot be acceded to as under the law, corporates are prohibited from issuing unsecured debentures with maturity of less than 90 days. allowing markets to issue very short - term instruments can have systemic implications. in any case, there are other instruments in the short - end like repo, cblo and cps that can meet the requirement of investors. fixed income markets 38. the fixed income markets in india, as is the case with the developed world is dominated by the government securities markets. a lot has been done to develop the market infrastructure for the government securities markets in the past two decades and