Recent and unexpected volatility among a number of prominent financial institutions in Europe and the US were a sharp reminder of the largely unprecedented few years the global economy has endured. While the initial storm seems to have passed, the question of contagion across financial institutions was front and centre in global markets for the first time since the Global Financial Crisis of 2008. For obvious reasons, this is a worthwhile moment to pause and take stock of risk mitigation in our own financial system here in India.
Since 2008, Indian financial markets have come a long way. It is easy to become captivated by headline figures—such as India’s consistently high economic growth through this period—but there have been important policy foundations laid to increase local resiliency among our financial players and the economy at large.
One underappreciated enabler of this period of relative calm has been the dual supervisory and developmental role that the Reserve Bank of India (RBI) has played. Broadly speaking, policy measures taken by the central bank in response to major global headwinds in recent times have been nuanced and tailored to meet the demands of each situation.
Most recently, in the wake of the covid pandemic, RBI turned to unconventional measures like Long-Term Repo Operations (LTROs), targeted LTROs and special refinance facilities for financial institutions. The success of special open-market operations under ‘Operation Twist’ demonstrated the regulator’s agility in the face of uncontrollable external shocks. Importantly, these central bank responses to the covid crisis were carried out without any dilution of collateral standards, which ensured that the system remained strong and cushioned from any further external risks.
Liquidity in government-securities and overnight-money markets has also grown, and with narrow bid-ask spreads, price discovery has been efficient. The foreign exchange market has seen strong growth in overall trading volumes and a suite of hedging products are gaining ground, while easing of rules on foreign direct investment (FDI) have led to higher inflows. Much of this growth has come against the backdrop of RBI policy reforms aimed at deepening onshore financial markets and increasing the efficiency of price discovery.
India’s digital payments system is now widely acknowledged as one of the most robust and innovative in the world; and the ‘India Stack’ is revolutionizing access to finance for over 1.4 billion people. Likewise, this same system is creating a bedrock of important financial data which will allow regulators and market participants alike to better understand the health of our economy.
The enabling, yet cautious stance of RBI has resulted in India’s financial institutions developing a growing level of sophistication in terms of their technology and workflows. Some of the leading Indian banks have put in place robust technological solutions to meet regulatory demands of doing business in a more globally connected world. It is not uncommon for large Indian banks to adopt turnkey solutions from global technology providers, including Bloomberg, to meet specific needs like their transition from Libor to Risk Free Rates or the calculation of initial margin requirements for compliance with Uncleared Margin Rules (UMR).
Going forward, meeting India’s growth aspirations will require an even larger financial market. As RBI Governor Shaktikanta Das remarked in a recent speech at the Fixed Income Money Market and Derivatives Association and Primary Dealers Association of India (FIMMDA-PDAI) Annual Conference on 27 January 2023, the central bank needs to work with key stakeholders to focus on growing specific areas of financial markets, including deepening the secondary market for government securities, improving liquidity in the interest rate derivative market and improving access of retail investors to derivatives markets.
Steady and stable growth of Indian financial markets in the past decades has built an ideal launchpad for the next level. But that doesn’t mean that the system is immune to old as well as new risks. As Indian banks and financial institutions stride into this exciting new phase with an expanded range of products and newer market participants, they will face elevated levels of risk too.
Indian banks that harbour the ambition to grow globally will have to proactively prepare and equip themselves with more sophisticated and efficient systems to optimize their workflows and strengthen risk management, portfolio monitoring and compliance.
Making the most of this sense of cautious optimism within the Indian financial system hinges on how it stays adequately shielded from risk over this upcoming journey. Sustainable, meaningful growth in the Indian financial markets is on the table. With a strong enabling environment in place, the focus is now on market participants to walk the walk.
Rightly, there will be ample discussion this year about how to showcase India’s achievements to the world by means of the country’s current G20 presidency. While the global economy is poised to throw up plenty of challenges in the years ahead, the quiet but remarkable levelling up of Indian financial institutions isn’t something that should get lost in the shuffle.
.Rajiv Mirwani is head—South Asia, Bloomberg
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