RBI Governor Sanjay Malhotra’s Message to Banks and Primary Dealers
In a recent address, Reserve Bank of India Governor Sanjay Malhotra cautioned financial market intermediaries that the privileges enjoyed by banks and primary dealers (PDs) come with clear obligations to ensure fairness and access across markets.
Malhotra stated that market participants must acknowledge that while a privilege bestows some benefits, it also entails responsibilities. He added that banks and PDs enjoy exclusive access to liquidity facilities and short-term money markets, and act as market-makers in over-the-counter (OTC) derivatives.
Privileges and Responsibilities
According to Malhotra, these privileges accord immense market power to the PDs and banks, which is beneficial for their growth. However, he stressed that this market power must be exercised responsibly, ensuring that every user has easy access to financial markets, can transact on fair and transparent terms, and that market integrity is protected and promoted.
Malhotra also pointed out that despite the markets having ‘matured considerably,’ there are still persistent issues such as limited product diversity in interest rate derivatives and underdevelopment of credit derivatives.
Indian Banks and Offshore Market-Makers
Malhotra noted that Indian banks continue to deal largely with offshore market-makers rather than end-users, urging them to evolve into global market-makers if onshoring of the rupee market is to succeed. He also called for greater retail participation and improved access, saying that the foreign exchange retail platform remains underutilized and should be prioritized by banks to ensure ‘a fair deal’ for smaller users.
Policy Push and Collective Responsibility
Malhotra emphasized that the central bank stands prepared to deploy appropriate policy measures, as warranted, to mitigate spillovers and ensure orderly market conditions. However, he stressed that strengthening financial resilience is a collective and shared responsibility, requiring institutions such as trade repositories to improve data quality and availability to support risk assessment and effective policymaking.
He also highlighted the importance of FIMMDA and PDAI in strengthening market conventions, standardization, and discipline. FIMMDA is a voluntary market body for the fixed income, money, and derivatives markets, while PDAI is an association for PDs accredited by RBI to represent their interests and evolve suitable market practices for participants.
Development and Deepening of Markets
On the development front, the RBI has taken multiple steps to deepen markets, including expanding central clearing in forex derivatives, introducing new instruments such as total return swaps on corporate bonds, and easing norms for foreign portfolio investors. Measures to enhance transparency, including broader reporting of OTC derivative transactions, have also been rolled out.
Malhotra expressed confidence that with continued collaboration among all stakeholders, Indian financial markets will mature further, providing a stable and conducive environment for investors and market participants.