1FinancialmarketsinIndia:InpursuitofstabilityanddevelopmentKeynoteAddressbyShriShaktikantaDas,Governor,ReserveBankofIndiaatthe22ndFIMMDA-PDAIAnnualConferenceonJanuary27,2023,DubaiItismypleasuretobepartoftheAnnualFIMMDA1-PDAI2Conferencetoday.IwouldliketoplaceonrecordtheReserveBank’sappreciationofthecriticalroleplayedbyFIMMDAandPDAIinthedevelopmentoffinancialmarketsinIndiaovertheyears,andmorerecently,inpartneringwiththeRBIinguidingthemarketsandtheeconomythroughtheturbulenttimesofCOVID-19,thewarinUkraineandtheturmoilinfinancialmarkets.2.Today,asIspeakbeforekeenmarketplayers,veteransandexpertsIthoughtthiswouldbeanopportunemomenttorecapturethejourneyofourfinancialmarketsinthelastdecadeorsoandreflectonwhereweareandwhatwethinkaboutthecourseahead.Anattempttodrawfromthepastandforgeahead,sotospeak.3.FromtheglobalfinancialcrisistotheEurozonesovereigndebttiveeasingtoamongthemostacceleratedmonetarytighteninginrecentgeopoliticalcrisiswhichthreatenstheworldorderasitexiststoday-it1FixedIncomeMoneyMarketandDerivativesAssociationofIndia(FIMMDA)2PrimaryDealers’AssociationofIndia(PDAI)2stormtoanotherintheyearssincetheglobalfinancialcrisis.AgainstthisbackdropthejourneyofIndianfinancialmarketshasbeendrivenbytwokeyobjectives–stabilityanddevelopment.Crisismanagementhasbeenakeycomponentofthisjourney.Nonetheless,anddeepeningoffinancialmarketswascontinuedevenamidsttheworststorms.neysofar5.LetmetakeamomenttoreflectonthejourneyofIndianfinancialmarketsoverthepastfewdecades.Rightuptotheendofthe1980s,regime,fixedexchangerates,acaptivegovernmentsecuritiesmarketinterestandexchangerates,shifttoamultipleindicatorapproachandeventuallytoflexibleinflationtargetingintheconductofmonetarypolicy,convertibilityinthecurrentaccountandgradualliberalisationoflegislativechanges:theForeignExchangeManagementAct(FEMA),1999;theGovernmentSecuritiesAct,2006;theamendmentstotheRBIActin2006togiveexplicitregulatorypowerstotheReserveBankovergovernmentsecuritiesderivativesandmoneymarketmentsandthePaymentandSettlementSystemsActTheandguaranteedsettlementformoney,governmentsecurities,forex3andtheNDS-OMplatformwereoperationalised.ATradeRepositorywasputinplaceforderivatives.SomeoftheseinitiativesbecameimportantatagloballevelonlyaftertheG20rolledoutitsreformsagendainthe2009PittsburghSummit.purposeofhedgingrisks,werelimitedintermsofparticipantsandproducts.Meanwhile,theBISTriennialsurveypublishedin2013showedthattherewasgrowinginterestintheIndianRupeeoverseas.TheonshoreandoffshoremarketsfortheRupee,however,remainedsegmented,withthespreadsbetweentheonshoreandoffshoreforexandinterestratesbeingwide.HeadwindsandTailwinds7.Comingtomorerecenttimes,manyofourpoliciesoverthelastdecadehavebeenguidedbythelearningsfromcrisismanagementaswellasthedevelopmentalobjectivesourcountryaspirestoachieve.Astheworldmovedthroughonestormafteranother,wewere8.Equallycompellinginguidingpolicyweretheneedsoftheeconomy.Astherealsectorgrewoverthelastdecade,expectationsthesedevelopments.Toplacethisinperspective,let’slookatsomefigures.NominalGDPincreasedfour-foldfrom?64lakhcroreforFY42010to?273lakhcroreforFY2023.3Externaltradealsoincreasedoverfour-foldfrom?29lakhcroreto?137lakhcroreduringthesameperiod.4TheratiooftradetoGDP5hasrisento45%in2021from25%in2000.ForeignDirectInvestment(FDI)6inthecountryhasrisensharplybytwoandahalftimessince2010.TheflowofresourcestothecommercialsectorinIndiaalmostdoubledfrom?12lakhcroreinFY2012to?22lakhcroreinFY2022.7Whilebankscontinuetobeadominantsourceoffinancing,marketborrowings8ofthecommercialsectorincreasedfrom?74,000croreinFY2012to?3,16,000croreinFY2022.Asoureconomyandfinancialmarketsgrew,theintegrationwiththeworldeconomyandglobalfinancialmarketshasalsorisen.fastestgrowingeconomieshasexpandedourfundingneeds.Allthesenecessitatelargeranddeeperfinancialmarkets.nsetoheadwinds9.Itisrelevanttolookatsomeofourpolicyresponsesinrecenttimes,especiallytomajorglobalheadwinds.Eachsuccessiveepisodeofturmoiloverthelastdecadeandhalfhasposedaspecificsetofchallengesfortheeconomy.Eachhaswarrantedaspecificresponse.10.In2008,policyactionswereaimedatensuringcomfortablesystemliquidity;augmentingforexreservesandmaintainingacrisismanagementframeworktosupporttheeconomythroughtheglobalfinancialcrisis.Conventionaltoolssuchaspolicyinterestratesand3Source:MinistryofStatisticsandProgrammeImplementation4Source:MinistryofStatisticsandProgrammeImplementation,RBIBalanceofPaymentStatistics5Source:WorldBank6Source:ReserveBankofIndia7Source:RBIHandbookofStatistics8Marketborrowingincludespublic&rightsissuesbynon-financialentities,grossprivateplacementsbynon-financialentitiesandnetissuanceofcommercialpaperssubscribedtobynon-banks.5cashreserveratio(CRR)wereused.Measurestomanageforexliquidityincluded,interalia,relaxingtheinterestrateceilingonforeigncurrencydepositsbynon-residentIndiansandexternalcommercialsuresincludedarupee-dollarswapfacilityforIndianbanks,arefinancewindowformutualfundsandaspecialpurposevehicleforsupportingnonbankingfinancialcompanies.11.PosttheannouncementofearlytaperofquantitativeeasingbytheFederalReservein2013,theneedforrestoringconfidenceofmarketparticipantsandcontainingthepressureontheRupeeguidedtheReserveBank’spolicyresponses.Monetaryconditionsweretightenedthroughunconventionaltools.Forexmarketmeasuresincludedbothdirectinterventionandadministrativemeasurestomanagecapitalflows.Theseincludedimportrestrictionsofnon-essentialitems,openingofaspecialdollarswapwindowforPSUoilcompanies,aconcessionalswapwindowforForeignCurrencyNon-Resident(FCNR-B)deposits,increasedoverseasborrowinglimitsofbanks,enhancedforeigninvestmentlimitsingovernmentdebtandrestrictionsonoutwardinvestmentflows,LiberalisedRemittanceScheme(LRS)entitlementsaswellasexchange-tradedderivatives.12.TheoutbreakoftheCOVID-19pandemicinMarch2020necessitatedswiftandfocussedpolicyresponsestoaddresstheemergingorpotentialmarketdislocations.Asinthepast,policyrateswerereducedandsystemicliquiditywasexpanded.But,thistime,thepolicycorridorwasasymmetricallywidenedandthefixedratereversecametheeffectiveanchorfortheevolutionofshortandlonger6transmissionofpolicyratesandensureflowofcredittotheaffectedsectors,unconventionalmeasureswereusedviz.,theLong-TermRepoOperations(LTROs),targetedLTROsandspecialrefinancefacilitiestoAllIndiaFinancialInstitutions.Apressureswasalsoinstituted.Forthefirsttime,theReserveBankSecuritiesAcquisitionProgramme(G-SAP)whichprovidedanupfrontcommitmentontheamountstobepurchased.Specialopenmarketoperationsinvolvingsimultaneouspurchaseandsaleofsecurities(OperationTwist)wereundertakenfororderlyevolutionoftheyieldwiththeemergenceoftimeandstate-contingentguidance,withassurancesontheReserveBank’scommitmenttomaintaincongenialfinancialconditions.Communicationbecameasignificantpartofourmonetarypolicytoolkit.13.TheonsetofthewarinUkraineagainweakenedrisksentiment,withcommoditypricesandinflationrisingtomulti-decadehighs.Asuiditytotackleinflationarypressures,financialmarketvolatilityspiralled,andtimeeschewedadministrativemeasurestocontainoutflowsandinsteadfocusedonmeasurestoenhanceinflowsthroughincentivisingnon-residentdeposits,foreigninvestmentsindebtinstrumentsandtheRupee,anadditionalarrangementforinvoicing,paymentandsettlementofexports/importsinRupeeswasputinplace.714.ThepointIwanttoemphasisehereisthatwhiletherewereclearcommonstrandsintheReserveBank’sresponsetovariousepisodesofturmoil,theresponsewascustomisedtoeachepisodeintermsofpolicyobjectivesandchoices,anduseoftoolkits.Everyresponsewasafunctionoftheunderlyingmacroeconomicconditionsandreflectedlearningsfromearliercrises.Inthiscontext,Iwouldliketomentionthreedistinctivefeaturesofourpolicyresponses.First,allliquiditymanagementoperationsbytheReserveBank,includingmeasuresformutualfundsandNBFCs,havealwaysbeenthroughbankswhicharetheliquidityconduitsfortheReserveBankeveninpeacetimes.Second,themeasuresentailednodilutionofcollateralstandardsandensuredthatthecentralbankremainedcushionedfromcounterpartyrisks.Third,mostofthemeasuresthistimearoundweretime-boundroriginallydefinedmaturityIllustrativelytheGSAPwasdiscontinued,relaxationswithrespecttoCRRwereallowedtonormaliseandtheliquiditymanagementframeworkwastweakedinApril2022tooperationalisethestandingdepositfacility(SDF).Thisapproachhasenabledustogetoutofapotentialliquiditytrap,theChakravyuh.15.Interestinglyandperhapsparadoxically,themeasurestoreformanddevelopfinancialmarketshavetakenplaceatanunprecedentedceduringadecadeofunprecedentedchallengesThereformswereaimedatdeepeningonshorefinancialmarketsandincreasingtheefficiencyofpricediscovery.Themorerecentreformssoughtto(i)ntationbysimultaneouslyeasingaccessofnonresidentstodomesticmarketsandpermittingresidentstoaccess8offshoremarkets;(ii)expandtheparticipationbasebyencouragingnon-residentparticipationinfinancialmarketsandretailparticipationthroughtheprovisionofeasyaccess,forexamplethroughtheRetailDirectandFXRetailplatforms;(iii)facilitatemoresophisticateduserstoaccessmarketsfortheirhedgingneedsandtoexpresstheirviewsofalargersuiteofproductswhichcanbecustomisedtotheneedsofprotectionoftheretailuserandasound,receptiveandacustomersuitabilityframework.Arobustinfrastructureandconductframeworkhasbeenputinplacethroughefficientclearingandsettlementarrangementsbenchmarkreforms,transparencyrequirementsandstipulationsonmarketabuse,amongothers.16.Indiahasalsocomealongwaytowardsachievinghigherlevelsofcapitalaccountconvertibility.LiberalisationofForeignDirectInvestment(FDI)flowscontinuedoverthelastdecade,withFDIbecomingunrestrictedexceptincertainsensitive/strategicsectors.Limitsfornon-residentinvestmentsindomesticmarketmarketswereliberalised.TheVoluntaryRetentionRoute(VRR)wasintroducedtofacilitatenon-residentinvestmentingovernmentandcorporatebonds.AFullyAccessibleRoute(FAR)whichplacesnolimitonnon-residentinvestmentinspecifiedbenchmarkgovernmentsecuritieswasintroducedaspartoffurtherliberalisationofportfoliodebtinflows.TheECBframeworkwascomprehensivelyliberalisedandisnowsubject9ThedirectionsonmarketmakinginOTCderivativeswhichcameintoeffectfromJanuary2022permittedmarketmakerstoofferavarietyofderivativeproductstoresidentstoefficientlydesignstrategiestohedgetheirrisks.Subsequently,severalnewproducts,e.g.,FXbarrieroption,binaryoption,targetedrangeforwardsintheforexmarketandswaptionsandtotalreturnswapsintheinterestratemarkethavebeenintroduced.9tionsliberalised.TheLRSisnowavailableforbothcurrentandcapitalaccounttransactions.standtoday17.Intheaftermathofmultipleshocks,theglobaleconomyisprojectedtocontractsignificantlyin2023.TheworstfortheglobalhindusLately,withsomeebbingofCOVID-relatedrestrictionsandcoolingofinflationinvariouscountries,thoughstillelevated,centralbankshavestartedwhatappearstobeapivottowardslowerratehikesorpauses.Atthesametime,theycontinuetoemphaticallyreiteratetheirresolvetobringinflationdownclosertotargets.Highpolicyratesforalongerfront,projectionsarenowveeringaroundtoasofterrecessionasagainstasevereandmorewidespreadrecessionprojectedafewmonthsback.18.Inthishostileanduncertaininternationalenvironment,theIndianeconomyremainsresilient,drawingstrengthfromitsmacroeconomicfundamentals.Ourfinancialsystemremainsrobustandstable.Banksandcorporatesarehealthierthanbeforethecrisis.Bankcreditisgrowingindoubledigits.Indiaiswidelyseenasabrightspotinanotherwisegloomyworld.Ourinflationremainselevated,buttherehasinflation,however,remainsstickyandelevated.19.Ontheexternalfront,de-globalisationandprotectionismaregaininggroundaswitnessedduringtherecentglobalsupply-chainshock.Itisthusnecessarytobuildandstrengthenbilateraltraderelationstodealwithsuchchallenges.IndiahasrecentlysignedbilateraltradeagreementswiththeUAEandAustraliaandmoresuchtoGDPratiostandsat3.3percentduringH1:2022-23.Theslowingglobaldemandisweighingonmerchandiseexports;butourexportsofservicesandremittancesremainstrong.Thenetbalanceunderservicesandremittancesremainsinalargesurplus,partlyoffsettingthetradedeficit.Consequently,thecurrentaccountdeficitiseminentlymanageableandwithintheparametersofviability.20.Onthefinancingside,netFDIflowsremainstrongandforeignfromtimetotimeThesizeofforexreservesiscomfortableandhasgoneupfromUSD524billiononOctober21,2022toUSD572billionrnaldebtratiosarelowbyveBanktoeschewmeasurestocontrolcapitalflowsandtakestepstofurtherinternationalisethedomesticcurrency,evenduringepisodesofsignificantcapitaloutflows.nappreciatingUSdollarimposingdownwardpressuresonmostothercurrencies.Comparisonoftheperformance10oftheRupeeacrosssuccessivecrisisepisodes10Source:DatafromBloomberghasbeenusedtoevaluatetheperformanceofRupee.itsworstdepreciation-betweenApril1,2008andMarch3,2009-atedbyduringthetapertantrumbetweenMay01,2013andAug28,2013.However,theextentofRupeedepreciationwaslowerineachsubsequentepisodeofturbulence.Intheinitialdaysofthepandemic,i.e.,betweenFebruary17,2020andApril21,2020,theRupeeemergingoutofUkrainein2022,whiletheRupeelost9%againsttheUSdollarbetweenFebruary24,2022andOctober19,2022,itoutperformedthecurrenciesofmostadvancedandmanyemergingmarketeconomies.22.Importantly,theRupee’sperformanceintermsofvolatilityiedvolatilityoftheRupeetouchedahighof25%duringtheglobalfinancialcrisisonOctober10,2008and20%duringthetapertantrumperiodonAugust29,2013.DuringtheCOVID-19pandemic,however,theimpliedvolatilitypeakedat10%onMarch24,2020andhasremainedwellthelowestamongpeernationsTheyieldcurvehasalsoevolvedinanorderlymannerwithoutanyunduevolatility,despitethesignificantlyhighergovernmentborrowing.11Dailyaverage1-monthimpliedvolatilityofRupeewas5%betweenJanuary1,2022andJanuary20,2023andreachedahighof8%onMarch7,2022.Source:BloombergLookingahead23.Today,whenwelookahead,westillseechallenges,butwecanprepareforthemwithoptimismandconfidence.TheIndianfinancialmarketshavedevelopedappreciablyovertheyears.Liquidityinthegovernmentsecuritiesandtheovernightmoneymarketshavegrown.remainnarrowreflectingefficiencyinpricediscoveryIntheforexmarketoveralltradingvolumeshavegrownandasuiteofhedgingproducts