RBI Deputy Governor Rohit Jain asserts that India's ambitious 'Viksit Bharat' goal by 2047 demands a significant shift from bank-centric financing to robust, deeper corporate bond, foreign exchange, and derivatives markets to meet its vast investment needs.
Key Points
- India's 'Viksit Bharat' goal by 2047 necessitates broader financing channels beyond traditional bank-led models due to the scale and diversity of required investment.
- Deeper corporate bond, foreign exchange, and derivatives markets are crucial for providing long-term capital and efficient risk pricing and distribution.
- Improving secondary market liquidity and continuous pricing of credit risk are key for the corporate bond market's next phase of development.
- The RBI is introducing measures like total return swaps and credit default swaps to enhance risk transfer and price discovery in derivatives markets.
- Financial institutions bear the responsibility of translating regulatory reforms into functioning, liquid markets, as regulators can only create the enabling framework.
India cannot rely on bank balance sheets alone to finance the scale and diversity of investment required to become a developed economy by 2047, Reserve Bank of India (RBI) Deputy Governor Rohit Jain has said, underscoring the need for deeper corporate bond, foreign exchange and derivatives markets.
"India has traditionally relied on a bank-led financing model.
"That model has served the economy well.
"However, the scale, tenor and diversity of financing required for Viksit Bharat cannot be met through bank balance sheets alone," Jain said at the Financial Institutions Leadership Conference organised by Standard Chartered Bank in Mumbai on July 24.
Broadening Financing Channels
India will require substantial long-term capital for infrastructure, manufacturing, urban development, technology and the expansion of domestic companies, making it necessary to broaden the channels through which savings are converted into investment, he said.
Jain said a stronger complement of market-based finance would be needed, including government and corporate bond markets for long-duration capital and deeper foreign exchange and derivatives markets to price and distribute risks.
"The financial markets required by a developed economy must be built before the economy reaches developed status -- not afterwards," he said.
Enhancing Corporate Bond Market Liquidity
While India's corporate bond market has seen growth in primary issuance, particularly among highly rated companies, Jain said the next phase should focus on improving secondary market liquidity and continuous pricing of credit risk.
"Issuance creates financial assets; liquidity helps create a market around them," he said, adding that greater liquidity would improve price discovery, lower entry and exit costs, and encourage participation by a wider range of issuers and investors.
Addressing Derivatives Market Concentration
Jain also flagged limited activity in the term money market and concentration in India's derivatives markets.
While overnight money markets were active and efficiently transmitted policy rate changes, activity beyond the overnight segment remained modest, he said.
Similarly, interest rate and foreign exchange derivatives markets have expanded but remain concentrated in a limited range of products and tenors, while credit derivatives are still developing.
He cited the RBI's recent introduction of total return swaps and futures on credit indices, along with the extension of credit default swaps (CDS), as measures aimed at improving risk transfer and price discovery.
Innovation and Responsibility in Financial Markets
However, Jain cautioned that introducing new financial products alone would not deepen markets and warned against mistaking complexity for sophistication.
"The purpose of innovation should be to make risk more manageable, not less visible," he said, stressing the need for suitability assessments, transparent disclosures and fair pricing.
Jain also put the onus on financial institutions to translate regulatory reforms into functioning markets, saying regulators could create an enabling framework but could not manufacture liquidity.
"Liquidity cannot be created through regulation, nor can participation be mandated into becoming meaningful," he said.
"While the regulator can create the conditions for markets to develop, it is the market participants who must convert that opportunity into liquidity, capability and trust," Jain added.
