The banks should focus on bolstering the participation of Indian entities in rupee derivatives markets, both domestically and internationally, while maintaining a prudent approach, the Reserve Bank of India Governor Shaktikanta Das said on Monday.
The governor said that despite some progress, the involvement of domestic banks in derivative markets remained constrained, with only a limited number of active market-makers.
Das said that while Indian banks are gradually increasing their presence in global markets, their footprint remains relatively small.
Presently, domestic banks predominantly interact with global market-makers rather than end clients, and they are yet to establish themselves as significant market-makers globally.
While speaking at the FIMMDA-PDAI Annual Conference on Monday he said, “Participation of domestic banks in derivative markets remains limited with only a small set of active market-makers. Participation of Indian banks in global markets is growing but it is quite small. Domestic banks are dealing with market-makers in global markets rather than with end clients and are yet to emerge as market makers of note globally.”
He further said that the journey towards pricing transparency is ongoing, with room for further improvement. Retail customers still do not receive deals comparable to those offered to larger clients. Effective market-making and precise pricing for smaller transactions on NDS-OM are essential.
Disparities in pricing between small and large customers in FX markets exceed what operational factors alone can justify.
Banks may need to increase efforts to promote the use of the FX Retail platform. He said that certain individuals or entities continue to exploit banking channels to fund unauthorised activities on FX trading platforms. This calls for heightened vigilance by banks.
The governor highlighted six areas which call for attention.
He said that liquidity within OTC derivatives markets, particularly in interest rate derivatives, remains concentrated in a few products, limiting the broader economy’s ability to hedge efficiently. Moreover, the market for credit derivatives, crucial for facilitating lower-rated corporate bonds, has not yet gained significant traction.
“I am, however, happy to note that the first credit default swap (CDS) transaction after the issuance of the revised guidelines came into effect in May 2022 was undertaken last week. In many ways, all domestic market participants are yet to fully embrace the new regulatory framework and exploit the opportunities it presents,” he said.
First Published: Apr 08 2024 | 5:27 PM IST