and 5 - year g - secs. if the reason for mutual funds not actively participating in the g - sec market is the underlying interest rate risk, then they obviously should make use of the irf to hedge their interest rate risk. their active participation will give impetus to the development of the irf market. the launch of credit default swap ( cds ) is impending. the guidelines on introduction of plain vanilla otc single - name cds for corporate bonds in india would be effective from october 24, 2011. the mutual funds would be eligible to buy credit protection ( buy cds contracts ) to hedge their underlying credit risk on corporate bonds. they would also be permitted as market - makers subject to their having strong financials and risk management capabilities as prescribed by sebi and as and when permitted by the sebi. it is expected that mutual funds ’ participation will provide momentum to the cds market. a significant feature of mmmfs or liquid mutual funds in india is that they have been mainly catering to the short - term investment needs of institutional investors such as corporate and banks whose redemption requirements are large and simultaneous. as on march 31, 2011 5, the investor profile of liquid funds was dominated by corporate ( 76. 5 per cent ) followed by banks / fis ( 17. 1 per cent ), hnis ( 5. 3 per cent ). as a consequence, when the banking sector faces liquidity shortfall and withdraws its investment from liquid mutual funds, they collectively come under stress. this may lead to a sharp fall in banks ’ fresh investment in liquid funds which, in turn, could intensify the pressure on those entities that receive investments from the liquid funds. it may be recalled that during october – november 2008, rbi had to provide a special dispensation in the form of term repo facility of rs. 60, 000 crores, under which banks could avail central bank funds to address the liquidity stress faced by mutual funds, nbfcs, hfcs. banks were given an slr exemption up to 1. 5 per cent of ndtl to address this problem. a related issue is the circularity of funds between the banking system and mutual funds. banks invest in mutual funds and the mutual funds put large volume of funds back to the banking system through investments in cds, lending in cblo and market repos. such circular flow of funds between banks and mutual funds has the potential for creating systemic instability in times of stress / liquidity crunch. thus,

shaktikanta das : inauguration of the reserve bank innovation hub ( rbih ) inaugural address by mr shaktikanta das, governor of the reserve bank of india, at the reserve bank innovation hub, bengaluru, 24 march 2022. * * * 1. central banks are often viewed as traditional institutions that set monetary policies, issue currencies and regulate and supervise the financial sector segments and entities. for every economy to grow steadily and efficiently, this characteristic of a central bank is very important. being a full service central bank, the rbi also plays a developmental role and is looked upon as a residual regulator as well. 2. rbi has been able to perform its varied roles with required professionalism and pragmatism. the ability to combine traditional functions with innovation has been critical to ensure orderly growth of the financial sector. to achieve specific end goals, apart from its own initiatives, the rbi has been an institution builder and has nurtured the setting up and development of many institutions1 like nabard, ccil, npci, idrbt, igidr and rebit. 3. the recent phenomenon of technological innovations transforming the experience of availing financial services, be it banking, non - banking, payment services or being part of the financial markets has raised greater expectations from rbi to act as an innovation enabler as well. to promote and facilitate an environment that accelerates innovation across the financial sector, the reserve bank innovation hub ( rbih ) has been set up as a wholly owned subsidiary of the rbi. taking into consideration the availability of skilled personnel, innovation eco - system, linkages with academia / incubation centres etc., it was decided to set up the hub at bengaluru, karnataka. 4. this initiative puts rbi in an exclusive group of select global central banks that are enterprising enough to change the mode of engagement while dealing with innovation. it also reflects a genuine commitment to have continuous engagement with industry, innovators, academia and related stakeholders to nurture and leverage beneficial innovation in the financial sector, which can deliver customised products particularly relevant for those at the bottom of the pyramid. i have no doubt that this transformative move will facilitate further innovation not just in the areas under the remit of rbi but across the entire spectrum of financial sector in the country. 5. the rbih is an investment for the future. the hub is expected to build an ecosystem for development of prototypes, patents and proofs of concept and promote