MUMBAI: Indian lenders must play a larger role in global derivatives and work to ensure that smaller retail players do not pay more for access to foreign exchange products, central bank governor Shaktikanta Das said Wednesday, underscoring the need for local banks to reflect the country’s rising economic status and emerge as market makers.
“Participation of domestic banks in derivative markets remains limited with only a small set of active market-makers… 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,” Das said at a conference of fixed income market participants in Barcelona.
While ensuring prudence and due diligence, the focus should be on widening participation of Indian players in markets for rupee derivatives, both local and offshore, Das said, pointing to the crucial hedging function that derivatives markets provide to the economy.
Observing that liquidity in over the counter (OTC) derivatives markets, especially interest rate derivatives, is largely confined to a few products, Das said that local market players were still to fully utilise new regulatory frameworks and exploit opportunities.
Reiterating an issue that the Reserve Bank of India (RBI) has flagged numerous times over the past year, Das said that retail players are yet to receive the same fine pricing that large customers enjoy.
“Divergence in pricing in FX (foreign exchange) markets for the small and large customers are wider than what can be justified by operational considerations,” Das said, adding that lenders may need to do more to facilitate the use of the FX Retail Platform.
Another oft-repeated issue which Das brought up was that of banking channels being used by entities to fund activities on unauthorized FX trading platforms. He exhorted lenders to enhance their vigilance on the issue.
Calling upon bank treasuries to make the most of opportunities presented through recent regulatory reforms, Das said this was “critical” for effective market intermediation and management of financial risks.
Referring to new regulations on banks’ handling of their investment portfolios, Das said that the fresh norms give more flexibility, provided lenders manage their treasuries actively.
“The framework of assessment of a bank’s treasury should take into account risks arising out of action and risks arising out of inaction i.e., missed opportunities,” he said.
Listing out steps that the RBI was taking on technological platforms to expand the scope of financial markets, Das said that work was being done to increase the reach of the RBI’s Retail Direct platform for investment in government securities as well as FX Retail.
Source: The Economic Times