RBI Governor on Market Trends & Challenges 2025

Governor, Reserve Bank of India Shri Sanjay Malhotra address the 24th FIMMDA-PDAI Annual conference, Bali, April 18, 2025

Summary of the address can be formed as:

• The Indian economy and the financial markets have demonstrated remarkable resilience while they are not immune to the vagaries of an uncertain and volatile global environment. domestic growth-inflation balance has improved significantly.
• There has been a decisive improvement in headline inflation which is projected to remain aligned to the target of 4% in FY26.
• Global uncertainties and weather disturbances, however, pose risks to the inflation outlook.
• Yet, it is much below what we aspire for.
• Repo rate is reduced twice and provided sufficient liquidity.
• all market segments including FX, G-sec, Money Markets, have largely remained stable.
• Equity markets experienced significant correction, as capital outflows accelerated, a trend seen in most emerging markets.
• The government securities market has however, remained rock-steady throughout the year.
• The gross market borrowings of the central and state governments, totalling ₹24.7 lakh crore in FY 2024-25, sailed through smoothly. The cost of borrowing for the central government came down by 28 basis points to 6.96 per cent in FY25 from 7.24 per cent in FY24. The secondary market in g-secs continued to be deep and active, partly aided by India’s inclusion in global bond indices.

Financial markets

i. As the marketplace for raising capital and trading financial assets, financial markets are key enablers of economic growth.

ii. Financial markets have evolved over time.

iii. Integrity of operations and the fostering of trust are fundamental to any financial market.

iv. In India, financial markets have evolved within a regulated framework, adapting to changing regulatory philosophies and approaches.

v. Interest rates were deregulated.

vi. The exchange rate was freed.

vii. The Rupee became fully convertible on the current account.

viii. The capital account was progressively liberalised.

ix. In the years that followed, even as the financial markets in India developed, the overarching approach was driven by the priorities of macroeconomic and financial stability. In recent years, however, our growing and more interconnected economy placed increasing demands on financial markets.

x. Against this backdrop, the Reserve Bank’s efforts in recent years to develop financial markets have focused on supporting the needs of an aspirational economy.

Financial markets: Recent trends

Over the past few years, we have witnessed significant developments that have transformed our markets into a dynamic and resilient force.

• 80 % increase in average daily volumes in the overnight money markets from about ₹3 lakh crore in 2020 to over ₹5.4 lakh crore in 2024;
• 40 % increase in average daily volumes in the g-secs markets to ₹66,000 crore over the same period;
• Almost doubling of average daily turnover in the forex market from 32 billion USD in 2020 to 60 billion USD in 2024;
• 622 % increase in notional outstanding interest rate derivatives from around ₹18 lakh crore in 2015 to over ₹130 lakh crore at the end of FY25;
• 2,233 % increase in average daily client volumes in MIBOR OIS (the most liquid derivative product) from approximately ₹600 crore in 2015 to nearly ₹14,000 crore in 2024;
• 73 % growth in average daily volumes in FX forwards and swaps from US$ 15 billion to over US$ 26 billion over the last decade; and
• Daily volumes of about US$ 7 billion in Non-deliverable forward (NDF) trades by domestic banks in recent months compared to negligible volumes on June 1, 2020, when it was first permitted.

The number of participants in the markets have also increased concomitantly:

• Several standalone primary dealers have been granted Authorised Dealer licences. The set of eligible market-makers has been expanded for the interest rate and credit derivative markets though interest here appears muted.
• In the last decade, the number of clients registered with the CCIL Trade Repository for interest rate derivatives has increased by about 3,233 % from about 300 to nearly 10,000 and for foreign exchange derivatives by 3,854 % from 2,200 to about 87,000. Of course, not all clients will be active participants.
• Non-resident participation has also increased in the g-sec market especially after the inclusion in global bond indices. Foreigners now hold 3.2 per cent of g-secs as compared to 1.7 per cent in August 2023, ahead of the first announcement of the inclusion. Non-resident participation in the derivative markets has also been growing.
• Repo and government securities markets predominantly function on electronic platforms, and are centrally cleared. Most forex spot and forward transactions as well as most MIBOR and Modified MIFOR based interest rate swaps also trade on electronic platforms and are centrally cleared. All OTC derivatives are reported to a trade repository.
• While plain-vanilla products dominate the derivative markets, there has been a noticeable rise in customized products in both interest rate and forex derivatives, tailored to meet the diverse hedging needs of various stakeholders.
• Motivated to fulfil the nation’s evolving needs and aspirations and guided by learnings from successive crises, our markets have matured and advanced. Our market infrastructure is state-of-the-art.
• The levels of transparency are at par with the best in the world.
• Markets for government securities, foreign exchange, and key derivative products are highly liquid, relative to most peer economies and even to many advanced countries.

Issues and concerns

The Government securities market

• the turnover ratio (measured as the annual turnover to outstanding stock of securities) of dated government securities has remained modest at just over one (1). If the less liquid state government securities (SGSs) are included, the ratio falls to below one (1). Liquidity continues to remain concentrated in few securities, thinning out for longer maturities. Secondary market trading is dominated by banks and primary dealers with many large institutional investors remaining “buy and hold” investors. Of the 3,000 plus institutional investors in g-secs, the top ten participants contributed a third of the overall turnover during 2024.
• One continuing endeavour of the Reserve Bank has been to increase retail participation in the g-sec market. The launch of ‘RBI Retail Direct’ facility in November 2021, was one initiative in this direction. Recently, a mobile app for Retail Direct has been introduced. RBI also recently permitted retail clients of SEBI-registered non-bank stockbrokers to access NDS-OM. All of this makes it imperative to ensure that sufficient secondary market liquidity is available to such investors to be able to participate in the market at reasonable prices. Liquidity and pricing also need to improve for participants like cooperative banks, pension and provident funds with smaller deal sizes. Banks and primary dealers may need to play a much more active role to this end.

The Money Markets

• The dwindling liquidity in the call money market – whose rate is the operating target for monetary policy – also requires attention.
• This market is also critical for the robustness of the MIBOR, the benchmark for the interest rate derivative market.
• Also of concern are the asymmetries which arise on occasions between different money market rates– the rate at which RBI provides liquidity, the call money rate, the market repo rate and TREPS rate. This calls for more proactive functioning by banks – the entities with sole access to RBI’s liquidity facilities, the call money market and the repo markets – to ensure that RBI’s liquidity measures are promptly and seamlessly transmitted to the broader market.

The FX markets

• The foreign exchange markets are reasonably liquid with narrow bid-ask spreads. There is growing transparency in this market. All FX derivatives are reported to the Trade Repository and reporting of cash, tom and spot transactions has commenced.
• A bulk of FX spot transactions are traded on electronic trading platforms (ETPs).
• Authorised trading platforms are also available for forward transactions but there appears to be a preference for such trades to take place bilaterally. Trading on ETPs enhances transparency and market efficiency. We would like to see an increasing share of transactions done on ETPs.
• however, is largely confined to the period immediately before and after domestic FX market hours, suggesting that we are still some distance away from a true 24*5 market.
• Fair treatment of customers and transparency in forex pricing for the smaller and less sophisticated customers continues to engage our attention. Much more can be and needs to be done here.
• Divergence in pricing in FX markets for the small and large customers are far wider than what can be justified by operational considerations. FX-Retail, a transparent platform for undertaking FX transactions, has witnessed a lukewarm response and our feedback is that this is largely due to the reluctance of banks to offer the platform to their customers.
• There are regulations in place to ensure transparency in pricing for retail customers including a mandate for disclosing the mid-market or interbank rate to customers. As an industry, there is a need for market-makers to introspect and assess in what ways they can effectively deliver on these regulatory and fiduciary mandates.
• The Reserve Bank has recently announced that access to FX Retail will also be provided through the Bharat Connect platform. In the first phase, a pilot to facilitate purchase of US dollars by individuals is planned. Subsequently, its scope will be expanded based on the experience gained. I would appeal to all the financial market participants including Authorised Dealers to extend their full cooperation in ensuring that the pilot is implemented smoothly and successfully.

The derivative markets

• The size of the derivatives market, while growing, remains small in absolute terms and relative to our GDP.
• There are other issues apart from that of size.
• The liquidity in the interest rate derivative markets, for example, is limited to one or two products.
• Despite many efforts over the years, the interest rate futures market or the credit derivative market are yet to pick up.
• Market-making remains confined to banks, both in FX and interest rate derivatives.
• While this is not surprising, given that the Indian financial system is bank-dominated, the presence of a wider variety of players has the potential to enhance market depth, add to the diversity of views and foster greater competition and efficiency.
• Meanwhile, developments elsewhere, including the need for more proactive management of risks by different stakeholders, have made the further development of these markets an imperative.
• The swap market based on an overnight rate may not be best suited to hedge such exposures especially as it is also used to express views on expected monetary policy movements.
• As was observed by the Committee on the MIBOR Benchmark, most developed countries have at least two major benchmarks – one used to take a view on the future movements of the policy rate and another used by the real sector to hedge risks.
• At least, a market for basis swap instruments needs to develop to manage the associated basis risks. The Committee also recommended the development of a Secured Overnight Rupee Rate (SORR) based on the secured overnight market. I understand that the Financial Benchmarks India Limited (FBIL) is developing the benchmark. Going forward, derivatives based on the SORR will also need to be developed.