RBI CONCEPTS:REGULATION OF FINANCE MARKET#13

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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.

Broad Regulatory Instruments:

Government securities market: The Government securities market, trades securities issued by Central and State Government. It has a sizeable primary and active secondary segments.

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, Primary dealers and financial institutions and Certificates of Deposit (CD) issued by banks to institutional investors.

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. Over the years, the foreign exchange spot, as well as forward market, has expanded quite significantly.

Derivatives: In the OTC (OVER THE COUNTER) 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. In addition, there are exchange-traded interest rate futures (IRF) which are also open to Foreign Portfolio Investors (FPI). .

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Hemant Bhatt

Chief Mentor at Oracle IAS

Hemant Bhatt is a B. Tech from Pantnagar University and has studied Social Sciences at SciencesPo, Paris. He teaches at Oracle IAS, Dehradun. He has given 5 UPSC mains back to back along with 2 interviews.
He is a bibliophile,accomplished writer and a fitness enthusiast.

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