Financial Market under RBI


Major market segments under the regulatory ambit of the Reserve Bank are interest rate markets, including Government Securities market and money markets; foreign exchange markets; derivatives on interest rates/prices, repo, foreign exchange rates as well as credit derivatives.
The Reserve Bank derives statutory powers to regulate market segments from specific provisions of the Reserve Bank of India Act, 1934. The prudential guidelines issued to eligible market participants form the broad regulatory framework for Government securities, money market and interest rate derivatives.
Government securities market: The Government securities market, which trades securities issued by Central and State Governments, has seen significant growth in the last two decades. It has a sizeable primary and an active secondary segments. Trading largely takes place on the Negotiated Dealing System-Order Matching (NDS-OM), an anonymous order-matching trading platform. The average daily trading volume in Government securities market has shown significant growth from Rs.32.15 billion in 2005-06 to Rs.433.12 billion in 2014-15. All the secondary market transactions in Government Securities are settled through a central counterparty mechanism under Delivery Versus Payment mode. Multilateral netting is achieved with a single funds settlement obligation for each member for a particular settlement date. The settlement is achieved in the RTGS (Real Time Gross Settlement) Settlement/Current Account maintained by the member in the Reserve Bank.
Call money market: Uncollaterised call money market is restricted to banks and Primary Dealers subject to prudential limits. The collaterised segments include Collaterised Borrowing and Lending Facility (CBLO) and market repo transactions between banks and financial institutions. The money market also includes Commercial Paper (CP) issuances by corporates, PDs and financial institutions and Certificates of Deposit (CD) issued by banks to institutional investors. Detailed guidelines on each segment of the money market are available under the section Master Circulars for financial markets on this website.
Foreign exchange market: In the foreign exchange market, the Foreign Exchange Management Act, 1999 (Act 42 of 1999), better known as FEMA, 1999, provides the statutory framework for the regulation of Foreign Exchange derivatives contracts. Residents can hedge their foreign exchange exposures through various products, such as, forward contracts, options involving rupee and foreign currencies, currency swaps and cost reduction option structures in the OTC market. Foreign investors can also hedge their investments in equity and/or debt in India through forwards and options.
In addition, trading within specified position limits is permitted on exchange traded currency futures in four currency pairs and in USD for currency options. Residents are also permitted to hedge their commodity price risk, as per specific guidelines, in the overseas OTC markets and exchanges.
Over the years, the foreign exchange spot as well as forward market has expanded quite significantly. The average daily forex market turnover has grown from approximately USD 16 billion in 2005-06 to nearly US$ 55 billion in 2014-15. The average daily trading volume in the inter-bank USD/INR forwards was at USD 6.43 billion and that of the USD/INR futures was at USD 2.64 billion during the financial year 2014-15.
Derivatives: In the OTC interest rate derivatives (IRD) segment, interest rate swaps (IRS) and forward rate agreements (FRA) are permitted on various benchmarks where banks and primary dealers (PD) take hedging and trading positions. Other regulated entities like insurance companies, mutual funds, Non-Banking Finance Companies can participate in IRD for the purpose of hedging. The activity in IRS market has shown impressive growth with the average daily inter-bank trading volume (notional principal) in Rupee IRS at Rs. 88.60 billion in financial year 2014-15. In addition, there are exchange traded interest rate futures (IRF) which are also open to Foreign Portfolio Investors (FPI). Trading activity in the IRF market has picked up in the recent period with average daily trading volume of Rs. 19.18 billion during the financial year 2014-15.

Wednesday, 09th Sep 2015, 10:00:56 AM

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