1

A Report Summary
On

Report of the Committee on the Financial Markets

By



Mayank Singh 2008B3A7443G
Vikas Goel 2008B3A7700G



Submitted to:


Prof. Mridula Goel
Head of Department - Economics
BITS, Pilani - K K Birla - Goa Campus





Prepared in partial fulfilment for the evaluation of
BITS C263, Study Oriented Assignment

At








Birla Institute of Technology and Science, Pilani
(March-April, 2011)

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Contents
Acknowledgement ........................................................................................................................................ 3
Terminologies ........................................................................................................................................... 4
Introduction ................................................................................................................................................... 6
Framework and Approach ............................................................................................................................. 7
Macro-Economic Environment ..................................................................................................................... 8
Financial Markets .......................................................................................................................................... 8
Equity Markets .............................................................................................................................................. 9
Assessment of the IOSCO principles ............................................................................................................ 9
FOREX Market ........................................................................................................................................... 10
Assessment of the IOSCO principles .......................................................................................................... 10
Derivatives .................................................................................................................................................. 10
Trade monitoring and risk management ..................................................................................................... 10
Government Securities Market ................................................................................................................... 11
Assessment of IOSCO principle: ................................................................................................................ 11
Market Development .................................................................................................................................. 12
Money Market ............................................................................................................................................. 12
Money market instruments ......................................................................................................................... 13
1. Call money market .......................................................................................................................... 13
2. Repo market ............................................................................................................................................ 13
3. Collateralized Borrowing and Lending Obligation (CBLO) .................................................................. 13
4. Commercial Paper (CP) .......................................................................................................................... 13
Assessment of IOSCO principles ................................................................................................................ 13
Market Development .................................................................................................................................. 13
Disadvantages of Money market................................................................................................................. 14
Corporate Bond market ............................................................................................................................... 14
Credit Risk Transfer Mechanism ................................................................................................................ 14





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Acknowledgement

We have taken sincere efforts in order to present as detailed and as accurate an overview as
possible. However, this report would not have been possible without help and support from
several individuals who we would like to show our appreciation to.
We would like to express our heartfelt gratitude to Prof. Mridula Goel for providing support
during the completion of this report, and providing critical information without which deep
understanding of the Financial Markets would not have been possible.
We would also like to thank our parents, colleagues and friends who provided moral support and
helped out to the best of their abilities.

Mayank Singh

Vikas Goel















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Terminologies

Inter Alia Latin term for among other things. It is a phrase used in legal proceedings that few
facts stated are only part of the entire facts or rules and not the entire thing.
IOSCO International Organization of Securities Commissions
CFSA Certified Financial Services Auditor
FSAP Financial Sector Assessment Programme
IMF International Monetary Fund
FOREX Foreign Exchange
SEBI Securities Exchange Board of India
OTC Over the counter
PSS Payment and Settlement Systems
Voice brokers Brokers with whom communication takes place over phone lines.
CRR/SLR Cash Reserve Ratio/Statutory Liquidity Ratio
FEDAI Foreign Exchange Dealers Association of India
SRO Self-Regulatory Organization
Social overhead
capital
Capital spent on social infrastructure such as schools, universities, hospitals,
libraries.
Market
capitalization
Measurement of size of a business enterprise (corporation) equal to the share price
times the number of shares outstanding (shares that have been authorized, issued,
and purchased by investors) of a publicly traded company.
(Source: Wikipedia)
Institutional
Investor
Institutional investors are organizations which pool large sums of money and invest
those sums in companies. They include banks, insurance companies, retirement or
pension funds, hedge funds and mutual funds. (Source:Wikipedia)
Tax deducted at
source (TDS)
IT is one of the modes of collecting Income-tax from the assessees in India. This is
governed under Indian Income Tax Act, 1961, by the Central Board for Direct Taxes
(CBDT) and is part of the Department of Revenue managed by Indian Revenue
Service (IRS), Ministry of Finance, Govt. of India.
Delivery versus
payment
A type of securities transaction in which the purchaser pays for the securities when
they are delivered either to the purchaser or his/her custodian. (Source:
www.southportland.org)
Collateral A security pledged for the repayment of a loan
Maturity date Maturity or maturity date refers to the final payment date of a loan or other financial
instrument, at which point the (and all remaining interest) is due to be paid.
Discount loan A loan that is written with the interest or finance charges included in the face amount
of the note. Discount loans are also called pre-compute or add-on loans.
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Face value The value of a security that is set by the company issuing it; unrelated to market
value
Liquid In cash or easily convertible to cash
Capital account
convertibility
Capital Account Convertibility is a feature of a nation's financial regime that centers
on the ability to conduct transactions of local financial assets into foreign financial
assets freely and at market determined exchange rates, or in laymans terms it is
basically a policy that allows the easy exchange of local currency (cash) for foreign
currency at low rates.
Credit
Derivative
A credit derivative is a derivative whose value is derived from the credit risk on an
underlying bond, loan or any other financial asset. In this way, the credit risk is on an
entity other than the counter parties to the transaction itself. ...
Securitization Securitization is a structured finance process that distributes risk by aggregating debt
instruments in a pool, then issues new securities backed by the pool.
Government
Securities
The short- and long-term bonds the government sells to finance its expenditures.
Government
Debt
Government debt (also known as public debt or national debt) is money (or credit)
owed by any level of government; either central government, federal government,
municipal government or local government.
Prudential
regulation
The prudential regulation is regulation of deposit-taking institutions and supervision
of the conduct of these institutions and set down requirements that limit their risk-
taking. The aim of prudential regulation is to ensure the safety of depositors' funds
and keep the stability of the financial system.(Source: Wikipedia Answers
http://wiki.answers.com/Q/Definition_of_prudential_regulation)
Dematerialized
form
When securities are held in a book entry transfer system with no certificates, as these
are held in electronic accounts. (Source: www.barclayswealth.com)
Usance The period of time permitted by commercial usage for the payment of a bill of
exchange (especially a foreign bill of exchange). (Source:
wordnetweb.princeton.edu)
Hedging
instruments
Types of derivative instruments or assets/liabilities the cash flows or fair market
value of which can be used to fully or partially offset the changes in those of the
hedged items.
CIP Central Integrated Platform
Spot market The spot market or cash market is a public financial market, in which financial
instruments or commodities are traded for immediate delivery. (Source: Wikipedia)
Derivatives
market
The derivatives market is the financial market for derivatives, financial instruments
like futures contracts or options, which are derived from other forms of assets.
(Source: Wikipedia)
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Yield Return; gains; output.
Intermediary An intermediary is a third party that offers inter-mediation services between two
trading parties.
Leverage Leverage is a general term for any technique to multiply gains and losses.



Introduction
The Financial Sector Assessment Programme (FSAP) was launched with an attempt to analyze the nature
of the financial system of the member countries of IMF and World Bank. The programme covers various
aspects of the financial sector namely:

Assessment of the status and implementation of international financial standards and codes in the
regulation and supervision of the institutions and markets.
Assessment of the financial infrastructure in terms of legal provisions.
Analyzing liquidity management.
Payments systems
Corporate governance
Accounting and auditing
Transparency in monetary, financial and fiscal policies.
Data dissemination.

Thus the role of FSAP is the identification of the areas for strengthening resilience and fostering financial
stability in a country and smoother integration with global markets.

India first joined FSAP in 2001 to get its economy assessed by Fund/Bank. They did an assessment of the
economy for compliance with international standards and codes in 2002 and another review in 2004.
Since the last assessment done in 2001, India has undertaken a series of ongoing reforms in the financial
sector aimed at improving its soundness, resilience and depth. And this assessment has resulted in many
positive aspects such as:

Higher growth trajectory
Increased savings and investment in productive activities have expanded significantly
Higher percentage of credit as a percentage of GDP.
Financial market gaining depth, vibrancy and efficiency.
Capacity building.

In September 2005, the IMF and World Bank came up with a handbook which contains a detailed
techniques and methodologies for FSAP to be followed by countries to undertake their self-assessment.
On the basis of the guidelines provided by the FSAP; Indian government in coordination with the central
bank of India - Reserve Bank; formed a committee CFSA (Committee on Financial Sector Assessment) to
assess the financial sector of India. This committee assessed the financial stability of the economy and the
compliance with the standards (which indeed requires a lot of credibility) and codes so that a plan could
be made for the medium-term.
The overall results were that the financial system of India is indeed very sound and robust and majorly
India complies with the code and conducts of the International Standards. While performing tests like
Single factor stress test concluded that banking system of India was immune from vulnerabilities (this is
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because the Indian Banks have a huge reserve deposited in Central Bank - RBI in form of CRR/SLR) But
multi-factor tests could not be performed due to unavailability of the data (major form of the Indian
market is in the unorganized form so accountability is big challenge) and appropriate models for carrying
out the tests (same reason - because of the large amount of the implicit variance in the economy). Not
only this CFSA; find the drawback on which India still has a lot of scope to improve.

Timely implementation of the bankruptcy proceedings - indeed it is the highest in the world (a major
reason is corruption - where in parties exercise their power and deliberately delay in the outcome of
the results)
Often the creditors are not able to claim in the case of bankruptcy of debtors. There are laws to
protect for the same - i.e. As a creditor you have the right to:
#

o a share in the bankrupt estate's distribution, according to the priority of your claim
o a court hearing to determine the debtor's plans to liquidate nonexempt assets in Chapter 11, 12,
and 13 cases
o estate assets payments
o an adversary proceeding to prevent certain debts from being discharged
A resolution of the stressed assets is also equally necessary.

Framework and Approach

The CFSA has followed an approach which is based on forward-looking and holistic approach to self-
assessment based on three main aspects:
1. Financial stability assessment and stress testing.
This vertical looks after the level of safety in the financial sector by analyzing the risks and
vulnerabilities in various sectors.
2. Legal, infrastructural and market development issues.
This vertical looks into the developmental issues in the financial sector.
3. Assessment of the status of implementation of international financial standards and codes.
This vertical looks at the level of implementation of the financial codes and standards.

After encompassing various factors CFSA felt that the major regulatory institution in the financial sectors
namely - RBI (Reserve Bank of India), SEBI (Securities Exchange Board of India) and IRDA (Insurance
Regulatory and Development Authority) needs to be closely linked up. Even need for integration of other
regulatory agencies as well as Departments in the Government of India in the financial sector was felt.

Since the assessment of the various sectors was required to be done by personnel who were extensively
thorough with the technical knowledge of their departments - these only constituted the major portion of
the CFSA. This was essential because these were the officials who were well versed with the existing
problems and knew solutions for the same.

But since the technical personnel may be biased; so to tackle the same; CFSA constituted an additional
four independent Advisory Panels of non-official experts from the country. They made their assessment
based on the inputs provided by the Technical groups.


In addition to this; peers from abroad were asked to review the work in separate sessions with the Panel
and the CFSA members. Based on the suggestions of the peers - Advisory Panel made changes to their
report. It was followed by the assessment of the report done by the CFSA based on the opinion of the
Advisory Panel and the peers. It totaled of six volumes, consisting of:
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Executive Summary
Overview report of CFSA
Four reports by CFSA - as afore mentioned.

The global crises (the global crises of the US economy due to the fall in the prices of Real Estates in
Housing and low demand) made the job of CFSA and its Advisory Panel even more complex. The global
turndown heated up the need for a global regulatory machinery to make it more resilient to the economic
shocks. The CFSA thus presented the results of the assessment of the Indias financial sector along with
the necessary medium term recommendations - even more so in places where there was a conflict in the
opinion of Peers , Panel and CFSA. There is no denying the fact that regulation and development of the
financial sector is herculean task and lot of conflict in the opinion exists in the matter.

Macro-Economic Environment
Macroeconomic developments and shocks have direct impact on the financial market and hence it is very
critical to predict the problematic which can creep in beforehand and to be prepared for the same. Also, it
is quite clearly evident that the financial sector of India in terms of institutions, markets and infrastructure
has flourished since the reforms of 1990s (the reforms were introduced in the wake of crises. The crises
lead India to follow a LPG (Liberalization, Privatization and Globalization) policy - and the Indian
economy could counter the problem).

Now in the wake of global turndown; the approach has been shifted towards a more cautious one. But the
results which were indicated from credit and market risks earlier showed that the banks are indeed
resilient. However, a concern on the liquidity of the banks has shown signs of worry. (But this can be
controlled by manipulating the CRR ratio by the RBI. RBI observes a strict check on the liquidity and
controls by increasing the CRR ratio when there is excess supply of the credit in the economy, and
reduces otherwise).

Financial Markets
In order to keep in line with the financial developments; financial markets have evolved as a medium of
resource mobilization (by providing a common place for traders - sellers of excessive of income over
expenditure and buyers who need the financing their projects which would have otherwise not been
possible without the same). Though the removal of the age old structure of the interest rate administration
has resulted in opening up of the economy; it has also made the sector much more vulnerable.

The International Organization of Securities Commissions (IOSCO) is an association of organizations
that regulate the worlds securities and futures markets. Its standards are not only important for the
guiding financial stability; in fact the government also assessed the FOREX, money and government
securities against its principles and formulated in the table.

The regulation of the financial market has been divided between RBI and SEBI and amendments in the
regulatory powers also keep taking place by the government.
Now, the role of RBI is to regulate the money supply, foreign exchange and government securities
market. Hence its roles are to:
Lend or borrow securities
Repo and reverse repo transactions.
Remove ambiguity regarding the legal validity of derivatives.
Determine policies related to interest rates.

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Equity Markets
With the setup of SEBI as a regulator; there has been a major growth, development and improvement of
the equity market due to risk management and settlement of disputes. The growth pattern continued till
end-2007. But since then there has been a considerable volatility in the market capitalism and PE ratios
mainly due to US recession. But the volatility has not affected the smooth functioning of the markets and
the settlement of the trades; which shows the robustness and the resilience of the market brought in by
SEBI and its stern check.
Assessment of the IOSCO principles
The assessment report reveals significant level of compliance with the standards prescribed. Various
methods adopted for regulation include:
On-site inspection
Off-site reporting
Investigation and surveillance of market and regulated entities
Timely availability of accurate information for the investors.
The holders of the security are treated in a fair and equal manner.


However, there have a few short-comings which have been observed role of operator in the following
areas -
Operational independence and accountability.
Inspection, investigation and surveillance powers.
Assistance provided to foreign regulators.
Minimum entry standards, capital and prudential requirements.
Internal organization and capital conduct of market intermediaries.
Procedure for dealing with the failure of financial intermediaries.

The advisory panel also felt that there is significant overlap between SEBI and government; with
government having powers to issue directions to SEBI even in other areas other than policy making. Also,
certain amendments were made in the SEBI Act:
Section 16: To empower the policy directions in interest of public interest only.
Section 5(2): According to this the government had the right to remove the Chairman or the Member
(by giving notice 3 months prior). But this proved hindrance in the operational independence of SEBI,
so need was felt to remove it.

However, the views of CFSA differs from those the IOSCO principles that the need of government is
necessary to provide depth no matter whatever degree of autonomy the regulator has. Also, the
government has never misused its power by exercising it via SRA (Statutory Regulatory Authorities).

Further issues which need to be addressed in the equity market are:
Improvement in the IPO process.
Better risk management by market participants.
Enhancement of knowledge standards and strengthening of the inter-exchange cross market
surveillance.
In order to enhance the accessibility of the investors; the Securities Appellate Tribunal should be
strengthened by setting up in each branch. A few originations which worked as trade and industry
associations but also performed the SRO could be reviewed for granting the status of SRO. Other issues
worth considering are - setting up CIP so that the investors can apply electronically for public issue.

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FOREX Market
The FOREX market is the fastest growing financial market in the economy which can be clearly seen
from the spot and derivatives market. In fact even BIS (Bank of International Settlements) placed India in
the top position amongst the countries surveyed by it. A few of the considerable observations were:

Annual turnover increased from USD 1.3 trillion in 1997-98 to 12.3 USD trillion in 2007-08.
Daily turnover increased from USD 5 billion in 1997-98 to USD 49 billion in 2007-08.
The forward and swap market continued to maintain its figures around 50% of the total turnover.
The low and stable bid-ask spread is also an indicator of the efficiency of the market.

The stability was maintained till the September 2008, after which considerable volatility has been
observed in the market (Cause - uncertainty caused due to US Recession).

Assessment of the IOSCO principles
The assessment report indicates that there is a considerable sufficiency with the prescribed norms.
However, there are shortcomings in the areas of Operational independence and accountability of the
regulator, co-operation and detection of manipulation and unfair trading practices.

Derivatives
In case of the derivatives market, the issues which need to be addressed are:
1. Need for uniform accounting regime across banks and corporates.
2. Desirability of the banks entering into complex derivatives with only those corporations that adopt to
revised accounting standards
3. Introduction of the disclosure of the FOREX derivatives transactions by the non-banks.

Inadequate standards would lead to a risks arriving from derivative over-leveraging.

Now, unhedged corporate exposure may lead to systematic risks and it is therefore necessary to create
hedging avenues in respect of the currency exposure of corporates. The Advisory Panel argues that in
order to maintain systematic stability; it is necessary to remove the existing restrictions underlying
hedging.

The CFSA acknowledges that the concept of hedging has been recognized by RBI as a financial step to
counter the system risks. But, however before RBI does any required underlying; it should judge the pros
and cons of the same.

Trade monitoring and risk management
The traditional role of a broker is to act as a gateway between foreign exchange deals, both within
countries and across borders. Earlier, all brokering in the OTC (Over-the-Counter) foreign exchange
market was handled by what are now called live or voice brokers. Communications with voice brokers are
almost entirely via dedicated telephone lines between brokers and client banks.

Beginning in 1992, electronic brokerage systems (or automated order-matching systems) have been
introduced into the OTC spot market. They perform similar function as that of a voice broker but in these
systems, trading is carried out through a network of linked computer terminals among the participating
users. They are also subjected to the same regulatory discipline as brokers. Such trading platforms in
India are not covered under the Payment and Settlement Systems (PSS) Act, 2007.
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Currently, foreign exchange brokers in India are accredited by the Foreign Exchange Dealers Association
of India (FEDAI) and since the system has been working well. There is no need for amending FEMA and
bringing the entities under the regulation of RBI. RBI monitors the foreign exchange position of banks
through Aggregate Gap Limits.

Where a foreign currency is bought and sold for different value dates, it creates no net position i.e. there is
no Foreign exchange risk. But due to the different value dates involved there is a mismatch i.e. the
purchase/sale dates do not match. These mismatches, or gaps as they are often called, result in an uneven
cash flow. If the forward rates move adversely, such mismatches would result in losses. Mismatches
expose one to risks of exchange losses. Aggregate Gap Limit is the limit fixed for all gaps, for a currency,
irrespective of their being long or short.

RBI has laid down norms to prevent failure of financial intermediaries. There are capital requirements
(capital that has to be compulsorily maintained) for financial intermediaries. Initial capital and risk-based
capital requirements are specified separately for banks. They are subjected to immediate corrective
actions, based on the review of their key economic indicators. There are capitals requirements in terms of
net-owned funds for Authorized Persons.

Government Securities Market
The government securities market is one of the most important segments of the financial market. The
market also serves as an important transmission channel for monetary policy. Due to the various steps
taken by the government, there has been a tremendous increase in the volume and liquidity in this sector.
The development of the primary segment of this market enables the managers of public debt to raise
resources from the market in a cost effective manner with due recognition to associated risks. A stable
and active secondary segment of the government securities market helps in the effective operation of
monetary policy through application of indirect instruments such as open market operations, for which
government securities act as collateral.

The evolution of the government securities market in India has been in line with the developments in
other countries. Slow development of the market in the 1970s and the 1980s was shaped by the need to
meet the growing financing requirements of the Government. This essentially resulted in financial
repression as progressively higher statutory requirements were stipulated, mandating banks to invest in
government securities at administered interest rates. Although this captive financing provided low cost
resources to the Government, it was a hurdle in the development of markets.

Wide ranging reforms in the government securities market were largely undertaken in response to the
changing economic environment (especially after 1991). Increased borrowing requirements of the
Government, due to the high fiscal deficits, had to be met in a cost effective manner without distorting the
financial system.

Assessment of IOSCO principle
An assessment of this market with the IOSCO principles revealed that most principles relating to
responsibilities and powers of the regulator, enforcement, market intermediaries, secondary market etc.
were fully implemented.
The principles relating to operational independence and accountability of the regulators, home-host co-
operation, and disclosure of financial results and procedure for dealing with failure of a market
intermediary are not fully implemented due to some structural and administrative constraints.

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The Panel on Financial Regulation and Supervision is of the view that Central/State Governments should
reduce the time lag in publication of audited financial results and increase the frequency of financial
disclosures so that government debt can be appropriately rated. This would give a more accurate picture
of the current government functioning and so would make government-issued paper more attractive to the
international investor. This would help in generation of foreign investment for social overhead capital.
Recently, a calibrated movement towards fuller capital account convertibility is taking place. The steps
have been cautiously taken because along with its benefit of higher and easy foreign investment, it has a
major drawback of creating instability in the market.

The Advisory Panel on Financial Stability and Stress Testing observed that, as fuller capital account
convertibility takes place, investment in government securities by foreign entities would also require the
strengthening of disclosure requirements. This would help the potential foreign investor to progressively
access Indian Govt. bonds.

Market Development
Major measures taken for the development of Govt. securities are:
Diversification of investor base (especially to non-banks and retail segment).
Effective mitigation of risks associated with interest rates, by making available various hedging
instruments
A gradual increase in the number of trading days for short selling in government securities.
Capacity building to study the suitability of a derivative product and its appropriateness.
Find alternate sets of investors in government securities that would buttress the demand for illiquid
and low quality assets.

Few measures for risk mitigation are:
o Holding securities till maturity.
o Re-balancing the portfolio wherein the securities are sold once they become short term and new
securities of longer tenor are bought.
o Asset Liability Management (ALM) (matching cash flows with liabilities).

Money Market
While the Government securities market generally caters to the investors with a long term investment
horizon, the money market provides investment avenues of short term tenor. The Reserve Bank
traditionally regulates the money markets. The Government notification under Section 16 of the Securities
Contract (Regulation) Act and the amendment to the RBI Amendment Act 2006 have further clarified the
powers available to the Reserve Bank to regulate the money markets.

Money market transactions are generally used for funding the transactions in other markets including
Government securities market and meeting short term liquidity mismatches. By definition, money market
is for a maximum tenor of up to one year. Within the one year, depending upon the tenors, money market
is classified into:

i. Overnight market - The tenor of transactions is one working day.
ii. Notice money market The tenor of the transactions is from 2 days to 14 days.
Iii. Term money market The tenor of the transactions is from 15 days to one year.

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Money market instruments
1. Call money market
Call money market is a market for uncollateralized lending and borrowing of funds. This market is
predominantly overnight and is open for participation only to scheduled commercial banks and the
primary dealers.

2. Repo market
Repo or ready forward contact is an instrument for borrowing funds by selling securities with an
agreement to repurchase the said securities on a mutually agreed future date at an agreed price which
includes interest for the funds borrowed.
The reverse of the repo transaction is called reverse repo which is lending of funds against buying of
securities with an agreement to resell the said securities on a mutually agreed future date at an agreed
price which includes interest for the funds lent.

3. Collateralized Borrowing and Lending Obligation (CBLO)
CBLO is another money market instrument operated by the Clearing Corporation of India Ltd. (CCIL),
for the benefit of the entities that have either no access to the inter-bank call money market or have
restricted access in terms of ceiling on call borrowing and lending transactions. CBLO is a discounted
instrument available in electronic book entry form for the maturity period ranging from one day to ninety
days (up to one year as per RBI guidelines).

4. Commercial Paper (CP)
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory
note. Corporates, primary dealers and the all-India financial institutions that have been permitted to raise
short-term resources under the umbrella limit fixed by the Reserve Bank of India are eligible to issue CP.

5. Certificate of Deposit (CD)
Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialized form or
as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a
specified time period.

Assessment of IOSCO principles
The assessment of compliance with reference to the IOSCO principles has revealed that except for a few
issues related to operational independence, accountability and regulatory co-operation, the money market
is generally complaint with the standards.

Market Development
Determination of appropriate interest for deposits or loans by the banks or the other financial institutions
is a complex mechanism in itself. There are several issues that need to be resolved before the optimum
rates are determined. While the term structure of the interest rate is a very important determinant, the
difference between the existing domestic and international interest rates also emerges as an important
factor.

Interest rate deregulation has made financial market operations more efficient, but it has also exposed the
participants to increased risks. Interest rate derivative products could be used as a hedging against risks.

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Disadvantages of Money market
o Absence of integration
o Absence of bill market
o Limited instruments.
o No contact with foreign money markets
o Limited secondary market.
o Limited participants.

Some recent developments
o Integration of unorganized sector with the organized sector
o Widening of call money market
o Promotion of bill culture
o Setting up of credit rating agencies.
o Establishment of DFHI (Discount and Financing House of India).

Corporate Bond market
In the last decade, market related borrowings by the corporate sector have remained depressed as a
plethora of Financial Institutions were available for disbursal of credit. These Institutions managed to
mobilize a significant amount of domestic savings and route them for corporate consumption. Hence, the
corporate bond sector has remained in its infancy stage in India.

Main reasons for the stagnation of the sector are:
Lack of buying interest
Poor transparency
Inadequate supply of paper from corporates
Absence of delivery versus payment (DVP) and tax deducted at source (TDS) systems for corporate
bonds

Taking measures like development of institutional investors, introduction of DVP in corporate bonds,
consolidation of all trades reported in different reporting platforms, abolition of TDS, reforms in pension
and insurance sectors would help the market in developing to its full potential.

Credit Risk Transfer Mechanism
Financial markets require mechanisms that allow the smooth but transparent transfer of risk to voluntary
and well-informed investors. In the past few years, the range of credit risk transfer (CRT) instruments and
the circumstances in which they are used have widened considerably.

A number of factors have contributed to this growth, including: greater focus by banks and other financial
institutions on risk management; a more rigorous approach to risk/return judgments by lenders and
investors and an increasing tendency on the part of banks to look at their credit risk exposures on a
portfolio-wide basis; efforts by market intermediaries to generate fee income and a generally low interest
rate environment, which has encouraged firms to search for yield pickup through broadening the range of
instruments they are prepared to hold.

A few steps for development of Credit Risk transfer mechanism are:
Exchange-trading of Credit-Risk transfer instruments
Credit derivatives should be recorded and settled through a clearing corporation.
Development of objective ratings for credit derivatives.
15

Financial institutions should develop capacity to measure their exposure to risk in a less benign
market and economic environment.
Market participants should keep pace with changes in the market through continued investment in
both risk management and processing infrastructure.

Concluding Remarks
Indian Financial market is one of the oldest across the globe and is definitely the fastest growing and best
among all the financial markets of the emerging economies. Also, the financial market in India at present
is more advanced than many other sectors. The equity, government securities, foreign exchange and
money markets along with their corresponding derivatives segments have developed into reasonably deep
and liquid markets and there has been significant increase in domestic market integration over the years.

Certain areas, however, could be further developed. Some suggestions in this regard are:
Giving SRO status to certain trade and industry associations to enhance regulatory efficiency, subject
to appropriate safeguards;
Further improvements in infrastructure and risk management systems.
More focused monitoring of market intermediaries.
Enhancing knowledge standards of the current and potential market participants through national
investor education and financial literacy.

With the economy moving towards fuller capital account convertibility, there is a need to strengthen
infrastructure, transparency and disclosure, and product range in the forex derivatives segment. Fuller
Capital account convertibility always has an instability factor associated with it (fuller capital account
convertibility makes conversion into foreign currency easier, thereby making disinvestment easier, that
might worsen a panic situation in times of crisis), hence the approach has to be cautious.

The government securities market has witnessed significant transformation in its various fields, which has
been primarily an outcome of persistent and high-quality reforms like market-based price discovery,
widening of the investor base, introduction of new instruments etc. Increased transparency and
disclosures, development of newer instruments and regulatory incentives are some of the areas that can be
further developed.

The money market is an important channel for monetary policy transmission and India has generally
conformed to being a liquid market. In the ongoing global financial crisis, whereas many money markets
in advanced countries have experienced serious difficulties, the Indian money market has continued to
function normally. However, the inability of market participants to take a medium to long-term
perspective on interest rates and liquidity, coupled with the absence of a credible long-term benchmark, is
a major hurdle for further market development and needs to be addressed.

The Reserve Bank had put in place regulatory guidelines that were aligned with global best practices
while tailoring them to meet country-specific requirements. While the development of markets for credit
derivatives and asset securitization products could play a critical role in furthering economic growth, this
requires to be pursued in a gradual manner by sequencing reforms and putting in place appropriate
safeguards before introduction of such products.