subir gokarn : regulatory perspectives on derivatives markets in india keynote address by dr subir gokarn, deputy governor of the reserve bank of india, at the international options market association, world federation of exchanges annual conference, organised by the national stock exchange, mumbai, 4 may 2011. * * * inputs from sudarsana sahoo, edwin prabhu, rajib das, h. s. mohanty, nishita raje and g. mahalingam are gratefully acknowledged. introduction it is a pleasure for me to be speaking at this conference organized by the international options market association. the presence and role of derivatives in india, both otc and exchange traded, has been increasing steadily over the years. these instruments are an important component of the overall financial sector strategy and the broad regulatory objective is to ensure that they are used to their potential in ways that are consistent with both financial development and the contribution of financial markets to economic growth. i would like to begin by laying out a simple framework, which helps us think about financial sector development in terms of multiple objectives. this will provide a useful backdrop to the various issues relating to derivatives in india, which i will then go on to talk about. financial sector development can broadly be viewed as pursuing four objectives. efficiency : we can look at the notion of efficiency from two perspectives. for the provider of products and services, it means the ability to do this at the lowest possible cost, with the full benefit of technology and market infrastructure. for the user, efficiency relates to the availability of products and services which address his / her requirements at the lowest possible price. stability : from the viewpoint of the financial system, stability requires that aggregate risk is bounded in some way. this requires, in turn, that individual participants be required to mitigate and manage their own risks. however, in situations in which systemic risk goes beyond the aggregate individual risk, additional measures may be warranted. transparency : the basic premise is : “ what cannot be measured cannot be managed ”. the more market participants know about overall activities and outcomes, the better able they are to make their cost - benefit calculations and act on them, contributing to the overall effectiveness of the market. inclusion : financial development is not an end in itself. it serves the broader purpose of facilitating economic activity, through resource mobilization and risk management. the more accessible the financial system is to individuals in pursuit of these two objectives, the better. against this backdrop, i will address four

very large money supply could result in inflation or higher prices which affect the common person the most. on the other hand, inadequate monetary resources can affect the growth and disrupt the payments system. rbi tries to strike a proper balance through its policies. currency management is an important function. for example, the new currency notes are issued by the reserve bank, old ones are withdrawn and destroyed. their design, production and distribution are managed – to be spread over the entire country. the reserve bank's currency note contains the words'i promise to pay the bearer a sum of …. '. that is signed by the governor. so, the reserve bank has to ensure that the value of rupee is maintained so that faith and trust of people is always present. to maintain the value of the rupee, the amount of goods and services that it can buy should not get eroded in a way that confidence in the currency is lost. so, the reserve bank's most important objective is to maintain price stability, contain inflation and anchor inflation expectations. incidentally, you may find in the currency note, the denomination is written in two central government official languages ( english and hindi ) and fifteen national languages. it shows the diversity of our country and the reserve bank's commitment to reach out to one and all. speaking about the value of money, the reserve bank is concerned not only with the value of money in india, but the related issue of value of our rupee in relation to the currencies of other countries : that is maintaining the faith of people outside our country also, in our currency. this work relates to exchange rate management. rupee cannot be directly used in settling transactions with other countries and international currencies like us dollar have to be used. to ensure smooth international transactions, it is necessary to maintain the external stability of the rupee. incidentally, confidence in rupee outside our country also depends very much upon domestic price stability. furthermore, rbi also maintains and manages foreign exchange reserves to sustain this confidence. people would like to borrow and lend money to each other for consumption and production overall, the demand and supply for such resources, in aggregate terms, need to be balanced by an appropriate level of interest rates which provide incentives for savers and also adequate returns to investors in industry, agriculture, etc. such a balance is struck by interest rate policies adopted by the rbi. i am over simplifying, but the idea is to strike broadly a balance – both within our country