Context:
Financial markets must play crucial role to fulfil India’s aspirations: RBI Governor
Issues in India’s Financial Markets:
- Government Securities (G-Secs) Market –
- Limited Diversity – Liquidity is concentrated in a few securities, leading to reduced trading activity for longer-maturity bonds.
- Low Turnover Ratio – Secondary market trading is dominated by banks and primary dealers, restricting broader participation.
- Money Market –
- Call Money Market – Liquidity in the call money market (borrowing/lending for one day) is declining, affecting short-term funding.
- Term Money Market (borrowing/lending of funds for a period exceeding 14 days) – Heavy reliance on overnight borrowing, with an underdeveloped risk-free term structure crucial for pricing interest rate products.
- Rate Asymmetries – Discrepancies exist between different money market rates, such as call money rate, market repo rate, and Tri-Party Repo Dealing System (TREPS).
- Tri-Party Repo – Involves a third-party intermediary managing collateral selection, payment, and settlement between borrower and lender.
- Foreign Exchange (FX) Market –
- Pricing Disparities – Significant divergence in pricing between small and large customers, leading to concerns over fairness.
- Transparency Issues – Non-compliance with regulatory mandates aimed at ensuring transparency in forex transactions.
- Derivatives Market –
- Limited Growth – The derivatives market remains small in absolute terms and relative to GDP.
- Lack of Diversity – Limited liquidity and product variety hinder market expansion and investor participation.
Way Forward:
- Develop a Secured Overnight Rupee Rate (SORR) to improve pricing benchmarks in derivative markets.
- Increase retail participation in G-Secs through initiatives like the RBI Retail Direct facility.
- Enhance transparency in FX markets by ensuring fair pricing for all customers.
- Strengthen liquidity measures to improve market efficiency and accessibility.
Source: The Print
Previous Year Question
Consider the following markets:
1. Government Bond Market
2. Call Money Market
3. Treasury Bill Market
4. Stock Market
How many of the above are included in capital markets?
[UPSC Civil Services Exam – 2023 Prelims]
(a) Only one
(b) Only two
(c) Only three
(d) All four
Answer: (b)
Explanation:
Government Bond Market and Stock Market are part of the capital markets.