Reserve Bank of India Deputy Governor BP Kanungo has said greater access to foreign investors to the rupee debt market, cash as well as derivative, will gradually be considered for the development of the money market.
According to Kanungo, non-resident investors bring volume and liquidity to the financial markets for the simple reason that there is a large corpus of savings available overseas, forever in search of yields. 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 said while addressing the FIMMDA-PDAI Annual Conference in Moscow.
Even though there has been a great deal of interest from foreign investors in rupee debt securities in recent times which protects the Indian borrower from foreign exchange risk in contrast with foreign currency debts, the threat to stability in the interest rate market and some residual threat to stability in the forex market remains, he said.
We would also work towards enhancing the overall liquidity in government securities market in terms of availability of two-way quotes in less liquid maturities through targeted market making schemes. Further, measures towards activation of a securities lending and borrowing programme, inter-operability of depositories for smooth transfer of ownership in securities will receive our attention, he said. We are also engaging government for active consolidation of government debt through frequent buyback/switch operation.
The evolution of the money market continues to be stunted as most of the activity is concentrated in the overnight segment and a robust term money market continues to elude the economy, Kanungo said.
There is some trading in the treasury bills, but activity in the commercial papers (CPs) and certificate of deposits (CDs) is confined to primary issuances. The interest rate derivatives market also continues to be lacklustre. There is reasonable liquidity in overnight interest swaps, but there is no appetite, and hence not much trading in other derivatives including interest rate futures, Kanungo said.
Kanungo said the Credit Default Swap market, introduced in 2012 is moribund.
It is ironical that while some participants used to write little understood products like quanto swaps a decade and a half back, there is little effort to provide simple products like caps or collars on bonds today, he said.
Despite allowing full access to non-resident investors to the domestic interest rate derivatives market, anecdotal evidence seems to suggest that an offshore market in this segment might be developing, much like the NDF market, he said.