ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Financial Sector Reforms

Unified Financial Code: Is India Ready? A Critique on the Financial Sector Legislative Reforms Commission Report by S S Tarapore; Gurgaon: LexisNexis, 2015; pp xii+166, ₹295.

Financial Reforms in an Endogenous Money Economy

An examination of the Reserve Bank of India's monetary policy leaves little doubt that India can be suitably characterised as an endogenous money economy. In an endogenous money environment, financial reforms will prove ineffective in stimulating credit supply to large commercial borrowers. They may, however, prove counterproductive by sharpening the credit constraints faced by agricultural and other petty producers in the economy.

Strengthening Dynamic Role of Monetary Policy

The repo rate exceeding the overnight call money rate continuously for months and the forward premia for the US dollar in the domestic forex market dipping below interest rate differentials may be said to reflect loss of effectiveness of monetary instruments. To restore the dynamic aspect of monetary policy, action on three fronts is called for.

Secondary Market to the Fore

The growth of the financial market in 2002-03 was much more marked in the secondary market than in the primary segment. Turnover in all three components of the secondary market - equity, debt and forex - continued to grow apace.

Banking: Missing Dynamism

Even as banks have come to possess a growing share of the community's financial resources, it is the absence of dynamism shown by them in expanding their credit base regionally, functionally and by the size of borrowers that continues to hurt the process of domestic investment and growth. It is necessary for them in a competitive environment to introduce more dynamic instruments of lending and enhance organisational capabilities to shoulder more nuanced lending practices, both of which are missing in the current banking scenario.

Reforming Indian Debt Markets

While equity markets in India have got radically transformed since the 1991-92 securities scam, the government securities markets have not changed very much except that the Reserve Bank of India has significantly improved the settlement process. Recognising the need for introducing transparency and to reform the secondary markets in government securities and money market instruments, the RBI will soon operationalise the Negotiated Dealing System (NDS). Simultaneously, the Clearing Corporation of India (CCIL), promoted by major banks, financial institutions and primary dealers, will be a key market infrastructure to significantly improve market efficiency and integrity. Together with the NDS, the CCIL will introduce major reforms in the way the government securities and money markets function today.
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