RBI: Development of markets is a complex process: Kanungo

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Mumbai: Development of markets is a complex process, said B P Kanungo, Deputy Governor, Reserve Bank of India.

“Development of markets is not driven by altruism; it requires alignment of incentives of all stakeholders – the investor, the investee as well as the regulator,” Kanungo said at FIMMDA – PDAI Annual Conference at Moscow.

“The incentives of the first two are well appreciated, but the regulator is often seen as a spoilsport in the process of development of markets,” he said expressing his concerns.

He said that it must be appreciated that the regulator’s objective is financial stability, avoidance of market failures and consumer protection, and the financial crisis has underscored the importance of these objectives.

He said one of the most important prerequisites of a liquid and robust market is wide participation by agents with large volumes of merchandise.

In this respect, banks constitute the single largest set of entities followed by insurance companies, pension funds, and now alternative investment funds. It has been generally observed that such of these entities as have large balance sheet, large holding of government securities are not very active either in markets or in innovation, he remarked.

“ There is perhaps a need to go beyond the comfort of 6-9-3 banking in search of unexploited market and unharvested returns,” he said.

There has been a gradual effort to remove the barriers to entry for non-resident investors in the debt segment. The gradual process is motivated by the possibility of sudden reversals causing turbulence in the interest rates.

He pointed that it is estimated that five years down the line, the demand for bonds will significantly outstrip the supply.

“It is a paradoxical situation. Is the market barring borrowers from the market?,” he said.

“ The issues relating to CDS comes to mind,” he said adding the basic purpose of CDS was to enable lower rated borrowers to access the market while the investor is protected against default by buying a CDS.

“But in a market, where only highly rated entities issue bonds, there will be no need for a CDS or rather, a CDS will leave nothing on the table for the investors, in comparison with a government security,” he said.

“Bringing liquidity into this and other derivative product needs introspection,” he added.

The risk management at market level is pretty robust, with central counterparty settlement, exchange traded products, trade repositories, legal entity identifier, etc, he added.

There have been discussions about market timings of various segments of financial markets.

“Taking into account the representations received from the market, we are examining current market timings with respect to trading, clearing and settlement cycles of financial markets regulated by the Reserve Bank to improve market efficiency,” he said.

He remarked the role of financial sector in a growing economy cannot be overemphasized. As the most important segment, the fixed income market in India has to grow to cater to the investment needs of an economy that aspires to become a $5 trillion economy in near future.

While the RBI and other sister regulators will continue to draw the contours of growth with financial stability in mind, the market needs more activity, innovation and enterprise from the community of participants in this market,” he concluded.

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