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 securities 2. 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. these remarks collectively summarise the presentations made earlier at the rbi symposium on establishing viable capital markets, 29 may 2019 ; the institute for indian economic studies ( iies ), tokyo, japan, 10 june 2019 ; the meeting with foreign portfolio investors, tokyo, japan, 11 june 2019 ; the national university of singapore ( nus ) asian leaders in financial institutions ( alfi ) programme, bengaluru, 20 june 2019, and fireside chat at the indian school of business, hyderabad, 29 june 2019. the report was delivered to the cgfs at the bis meeting on 23 january 2019 and is available at https : / / www. bis. org / publ / cgfs62. pdf 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

- 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 [ value ] % 35. 00 30. 00 25. 00 19. 25 % 20. 00 15. 00 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