RBIs Role in

Stock, Debt and Forex

Market

Segmentation of Markets
Segmentation of Markets

Money Market (Call / Term Money / CPs)

Credit Market
Govt. Securities Market
Foreign Exchange Market
Equity Market
Private Corporate Debt Market

Importance of Financial
Markets
A well functioning financial market is
key to sustained economic growth
Financial markets facilitate effective
implementation of monetary policy
Link in transmission mechanism
between monetary policy and real
economy

Efforts to develop markets

Reform process
Transformation in Structure, efficiency

and stability of markets

Market determined pricing of financial
assets
Removal of restrictions on participants
Introduction of electronic trading
platforms

Efforts to develop markets

Introduction of new instruments

Flows into Markets

Money flows into sectors where

return is attractive
Authorities should ensure Allocative
Efficiency
Should not result in instability in
certain segments which will have
adverse impact on the Financial
System

Role of RBI
to secure monetary stability
and to operate the currency and
credit system of the country to its
advantage

Guiding principle
Ensure Financial Stability
Provide Liquidity
Balanced Development and
Integration of Markets

What is Integration?
Process by which markets become

open and unified so that participants

in one market have an unimpeded
access to other markets
Implies that risk adjusted returns on
assets of the same tenor in each
segment of the market should be
comparable to one another [overall
equality of returns across markets]

Why Integration?
To
Ensure uninterrupted financial transactions
Maintain confidence in different segments
of the system - amongst all participants
and stakeholders
Ensure absence of excess volatility
affecting real economic activity
Ensure orderly conditions in the financial
markets to guard against potential
adverse effects on real economic activity

 To ensure Financial Stability

Earlier, stability was ensured by rigidity
Structural changes may bring in unstable
conditions
Our reform process tried to balance
structural changes, efficiency and stability
Financial Stability is the sine qua non of
rapid and sustainable economic progress (M.
Narasimham Committee on the Financial System, 1991)

RBI and Debt Market

Govt. Bond Market
Private Sector Debt Market

Legal backing to manage Govt.

bonds
RBI Act provisions:

Sec 21 (2): Obligation of Central Govt. to

entrust RBI with Management of Public Debt
and with the issue of any New loans
Sec 21-A-(1) (b): Management of Public Debt
and with the issue of any New loans by the
States
Sec 17 (11) (e): Empowered RBI to act as
Agent for management of Public Debt for
Central Govt., State Govt., Local authority, IFCI
or any one or authority approved by Central
Govt.

Legal backing to manage Govt.

bonds
Under s.17(8) of RBI Act, RBI is

authorised to purchase and sell G.

Sec.
RBI undertakes Open Market
Operations and LAF in these securities
S.16 of SC (R) Act, 1956 empowers
RBI to regulate dealings in G.Sec.

Internal Debt Management

Dept.
Policy matters connected with the
terms and conditions of the New
loans,
Date and method of issue and
The co-ordination of floatation of
various State Government Loans

RBIs initiative
Since April 1997, RBI took initiatives

to develop Govt. Securities and other

markets
To widen, deepen and create more liquid
markets
To integrate different segments of
domestic financial markets

Govt. Debt Market

Primary Dealers set up in 1996 to

develop the gilt market

Repos with Reserve Bank (in 1992)
and market repos
Infrastructure for development of the
market further improved with setting
up of Clearing Corporation of India
Ltd in April 2002, NDS in February
2002 and implementation of RTGS

Development of Govt. Securities

Market
Stoppage of automatic monetisation and introduction
of pre-announced market borrowing programme

Establishment of WMA framework

Introduction of auctions for T-Bills and dated securities
Encouraging establishment of Primary Dealers (PDs)
Underwriting by PDs - liquidity

Development of Govt. Securities

Market

Delivery vs Payment (DvP) System in

scripless settlement

Transparency and data dissemination

Introduction of T-Bills of varying
maturities

Development of Govt. Securities

Market

Consolidation and liquidity

Elongation of maturity-up to 30 years
Calendar for T-Bills auctions
Uniform price vs multiple price

RBI and Debt/Govt. Securities Market

Innovation in instruments
Permitting investments by FIIs in
debt instruments and allowing them
to hedge

Dedicated Gilts Mutual Funds

RBI and Debt/Govt. Securities Market

Electronic dealing system

Computerisation of PDO
RTGS
Clearing corporation
Norms for valuation of investments
Information dissemination

 Under FRBM Act, 2003 RBI is

prohibited from subscribing to

primary issues of Central Govt.
securities from April 1, 2006

Sterilisation of Capital Flows

Market Stabilisation Scheme

launched to absorb surplus liquidity

so that monetary policy and fiscal
policy are not adversely affected, at
the same time, build up of Forex
Reserve continues

RBI and Forex Market

Forex Market is the largest financial

market in the world

Floating exchange rate
Till 1978, ADs in India undertook only
merchant transactions
Intra Day trading increased volumes
in the market

 Exchange Rate was partially floated

in March 1992 and fully in March
1993
Since then exchange rate is market
determined
Current Account convertibility
brought about in August 1994

 As Forex Market is global, it is

necessary to prevent adverse

developments abroad affecting our
market
Within the country also, Forex Market
depends on the Exchange Rate Policy
In most of the EMEs, exchange rate is
floating, without any fixed targets

 Central Banks intervene in the market to

fight extreme turbulence to ensure

orderly conditions
Most of the EMEs have also accumulated
large Forex Reserves which have to be
managed
Monetary Authorities in these countries
have to pass through the impossible
trinity of fixed exchange rate, open
capital account and independent
monetary policy

 Till 1978, there was practically no

Forex Market in India

Banks were undertaking only cover
operations
When banks were allowed to
undertake intra day trades, they were
required to maintain square or near
square position at the end of the day

 Reforms brought about in early 90s,

enabled ADs to expand Forex Trading

RBI concentrated on institutional
development and moved away from micro
management of Forex Market
Banks were allowed freedom to cancel and
rebook Forward Contracts, Corporates had
the freedom to hedge commodity price risk
in international commodity exchanges, etc.

 Further liberalisation on Capital

Account had impacted depth,

liquidity and efficiency of the Market
The market, which was mostly spot,
now includes forward and derivatives
The Market, dominated by ADs, is
also influenced by Forex Brokers and
Corporates

 RBI intervenes only to ensure orderly

conditions
FEDAI plays an important role as a SRO
Category I ADs (86) dominate the market
For better price discovery and to provide
depth, ADs utilise the services of Forex
Brokers
Trades are executed in various platforms

 RBI had also taken various steps

mitigate settlement risk in the trades

CCIL commenced settlement of inter
bank USD-INR spot and forward deals
from Nov. 2002
Through a novation, CCIL becomes the
counterparty for trades and it settles
trades on multilateral net basis

 Rupee leg of the transactions are

settled in the current accounts with

RBI, while the Forex leg settled through
CCILs Forex A/c with settlement bank
in New York
During 2005-06, CCIL settled 9 lakh
deals worth US$ 1,180 billion
However, world over on any day,
US$1,880 billion worth of trades

 Foreign Exchange Turnover of Indian

Market rose from US$ 5 billion in 199798 to average US$ 23 billion by Feb.
2007
RBI intervenes in Forex Market to
prevent sharp depreciation / appreciation
of rupee and to curb excess volatility
Intervention is not guided by any predetermined target or band

 Mopping of Forex resulted in increase

in Foreign Currency Assets backing
the rupee
RBI has been mopping up excess
liquidity by Market Stabilisation
Scheme introduced from April 2004

RBI and Equity and Corporate

Debt Market
Traditionally Corporates relied on
banks and DFIs to finance their
projects
Corporates debts were mostly
privately placed

RBI and Stock Market

RBI regulated entities are allowed to

participate in equity market

Developments in Capital Market have
implications on money supply and
have impact on Forex and other
segments of financial market
Forex Market Share Market Money
Market linkages

RBI and Stock Market

High Level Co-ordination Committee

on Financial and Capital Market

(HLCCFCM)
Regulators are also required to
ensure that a market oriented system
is developed in co-ordination with
Government in respect of public
ownership of entities

Developments in Stock
Market
Stock Market firmed up
BSE Sensex constantly rose
Public Issues: Rs.32,382 crore raised

in 2006-07, as against Rs.26,940 crore

in 2005-06 mostly equity issues
Private Placements: Rs.1,03,169 crore
during April-Dec. 2006, which is 50%
more than the amount raised in the
previous period

Banks and Stock Market

Exposure of Banks:
Funded
Non Funded

Bank loans to individuals and Share

Brokers
Banks investment in share market
Providing Financial Services in Stock
Market

To sum up..
FMD set up in July 2005 to integrate

RBIs market operations and improve

efficiency in money, G. Sec and
Foreign Exchange Markets
Technical Advisory Committee on
Money, Foreign Exchange and Govt.
Securities Market advises RBI on
further measures