Yes, What the Doctor Ordered, Gov Das

The Economic Times     30th November 2020     Save    

Context: RBI governor spoke last week on the need for accelerating financial market reforms. 

Need for Financial Market Reforms:

  • Better allocation of resources
  • Mitigate financial risks
  • Boost transparency across the board

Issues with Financial markets:

  • While the interest rate derivative market has grown, it remains confined to one product, the Overnight Index Swap, and to a small set of participants.
  • Illiquid corporate bond market:  The vast bulk of it remains privately placed and simply held to maturity.

Steps taken:

  • The Bilateral Netting of Financial Contracts Act, 2020 should rationalise capital exposure for derivative contracts and could boost the market for Credit Default Swaps, and provide insurance for corporate bonds.
  • Banks can now deal in the offshore rupee derivatives market.
  • Norms for foreign portfolio investors have been eased.

Way Forward:

  • Policy-induced vibrant corporate bond market: to shore up transparency in the allocation of funds for big-ticket, long-gestation projects, and routine market oversight of the assets. 
  • A thriving fintech ecosystem: Fintech should be seen as an integral part of financial reform, not just to broaden access but also to improve the quality of mediation.

Conclusion: In tandem, what’s required is to complete the markets for better management of currency, interest rate and credit risks.