Das emphasizes: Banks must enhance presence in derivative markets

Reserve Bank of India (RBI) governor Shaktikanta Das emphasized the need for Indian banks to strengthen their presence in the derivatives market during his address at the FIMMDA-PDAI Annual Conference held in Barcelona, Spain on Monday.

Das pointed out that the involvement of Indian banks in the derivatives market remains limited and stressed the importance of enhancing and broadening their participation, both domestically and internationally, while maintaining prudence. He highlighted that domestic banks predominantly engage with market-makers in global markets rather than directly with end-clients, and they have yet to establish themselves as significant market-makers on a global scale. Das emphasized the necessity for banks to conduct thorough due diligence, assess their risk appetite, and proceed cautiously in expanding their presence in the derivatives market.

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Furthermore, Das underscored the need for improved liquidity in over-the-counter (OTC) derivatives markets, particularly in interest rate derivatives, to facilitate more efficient hedging for the broader economy. He noted that liquidity remains limited in certain products, hindering effective risk management. Additionally, Das highlighted the importance of enhancing liquidity for credit derivatives, which are essential for facilitating trading in lower-rated corporate bonds, an area that has yet to see significant development.

Regarding pricing transparency, Das acknowledged that progress has been made but emphasized that more efforts are required. He noted that there is still significant divergence in pricing in foreign exchange (FX) markets between small and large customers, which cannot be justified solely by operational factors. Das encouraged banks to do more to promote the use of the FX Retail platform to enhance transparency in pricing. He also raised concerns about certain individuals or entities using banking channels to fund activities on unauthorized FX trading platforms, emphasizing the need for heightened vigilance by banks in this regard.

Das also highlighted ongoing efforts to leverage technology to enhance market efficiency and meet regulatory objectives. He emphasized the importance of bank treasuries adapting to recent regulatory reforms and actively managing their treasury functions. Das noted that the new prudential framework for bank investments, implemented from the current financial year (2024-25), provides increased flexibility to banks in managing their treasuries, offering opportunities for greater efficiency if managed effectively.

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