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Development of Financial Markets in India Rakesh Mohan Deputy Governor Reserve Bank of India Lecture at the First Ind

Development of Financial Markets in India Rakesh Mohan Deputy Governor Reserve Bank of India Lecture at the First Indian-French Financial Forum at Mumbai, May 16, 2007. Scheme of the Presentation. Role of Financial Markets Money Market Government Securities Market

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Development of Financial Markets in India Rakesh Mohan Deputy Governor Reserve Bank of India Lecture at the First Ind

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  1. Development of Financial Markets in India Rakesh Mohan Deputy Governor Reserve Bank of India Lecture at the First Indian-French Financial Forum at Mumbai, May 16, 2007

  2. Scheme of the Presentation • Role of Financial Markets • Money Market • Government Securities Market • Foreign Exchange Market • Financial Market Integration

  3. Role of Financial Markets • Intermediate between savers and investors • Generate resources for investment and growth • Allocate resources efficiently • Improve the efficacy of the transmission mechanism of monetary policy

  4. Financial Markets in Pre-reform Period – Major Problems • Administered Interest rates • Limited Instruments • Restrictions on Participation • Segmentation of Markets

  5. Money Market • Role of the Money Market • Key role in the transmission of monetary policy impulses • Major Reforms Introduced • Development of the Liquidity Adjustment Facility • Development of collateralised instruments – CBLO and Market Repo • Modification in issuance norms and maturity profile of CD and CP • Setting up of central counter party – Clearing Corporation of India Ltd. (CCIL)

  6. Money MarketImpact – Increase in Activity

  7. Money MarketImpact – Decline in Volatility

  8. Money MarketImpact – Decline in Volatility

  9. Money Market Impact – Improvement in Efficiency

  10. Government Securities Market • Significance of the G-Sec. Market • Enables smooth raising of government borrowings • Risk free rupee yield curve provides a benchmark for pricing other debt instruments • Plays a key role in the monetary policy transmission mechanism

  11. Government Securities Market • Major Reforms in the G-Sec Market • Auction system for issuance of government securities • Primary Dealer (PD) system • New instruments • Widening of investor base • Debt consolidation – re-issuance of securities • Introduction of short-selling • When issued market allowed • Strengthening of trading and settlement infrastructure

  12. Government Securities Market - Impact

  13. Government Securities MarketReasons for the Recent Decline in Activity

  14. Government Securities MarketEmergence of Yield Curve

  15. Foreign Exchange Market • Major Reforms • Market-determined exchange rate in 1993 • Current account convertibility in 1994 • Substantial liberalisation of capital account transactions • Greater flexibility to market participants to undertake foreign exchange operations • Improvement in market infrastructure

  16. Foreign Exchange MarketIncrease in Activity Turnover in the Foreign Exchange Market

  17. Foreign Exchange Market Increase in Size: Relative Terms

  18. Foreign Exchange Market Improvement in Efficiency

  19. Foreign Exchange Market Decline in Volatility

  20. Financial Market Integration • Significance • For monetary policy transmission framework • Evidence of stronger integration during the recent period (2000-2006) than the earlier period (1993-2000) • Correlation between the call rate and the reverse repo improved from 0.35 to 0.86 • Correlation between the call rate and the 364-day Treasury Bills yield improved from 0.40 to 0.92 • Correlation between the call rate and the 10-year yield improved from 0.46 to 0.88 • Correlation between the call rate and the 6-months forward premia improved marginally from 0.61 to 0.62 • Correlation between interest rates (the call rate) and the stock market improved from -0.10 to -0.23.

  21. Financial Market Integration Interest Rates and Exchange Rate in India

  22. Financial Market IntegrationInterest Rate Spread over the Reverse Repo Rate

  23. Growth of Financial Markets in India – A Comparative Picture Table 6: Depth of Financial Markets in India – Average Daily Turnover (Rs.crore)

  24. The Way Ahead - Measures Announced in the Annual Policy Statement G-Sec. Market • A ‘Non-Competitive Bidding Scheme’ in the auctions of State Development Loans (SDLs) to be introduced. • A system of reissuances of State Government securities to be introduced. • Use of average cut-off yield on 182-day Treasury Bills, instead of the yield on 364-day Treasury Bills as a benchmark rate for the FRBs to be issued in future. • A Working Group being set up to suggest measures for developing the interest rate futures market.

  25. The Way Ahead - Measures Announced in the Annual Policy Statement Foreign Exchange Market • Further liberalisation of foreign exchange facilities in view of CFCAC • Overseas investment limit to be enhanced • Portfolio investment abroad limit to be enhanced • Increase in the existing limit for prepayment of ECBs • The limit for remittance scheme for individuals to be enhanced • Expanded the range of hedging tools available to the market participants as also facilitate dynamic hedging by the residents • A Working Group on Currency Futures to be set up

  26. Thank You

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