Greater challenges will emerge as markets become more developed, interconnected: RBI

M Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, has warned that as markets become more developed and interconnected, and as the range of products expands, greater challenges will emerge.

Delivering a keynote address on ‘Self-Regulation in Financial Markets – Looking Back and Looking Ahead’ in Egypt, the deputy governor said, “Going ahead, greater challenges will emerge as the markets become more developed and interconnected, and as the range of products expands.” 

He predicted that new frontiers would emerge as Indian banks expanded their presence in offshore markets, non-resident participation in domestic markets increased, and technological changes continued to transform how markets functioned.

According to a Reserve Bank of India statement released on Thursday, foreign exchange market participants will need to prepare themselves to manage the changes and associated risks, and the Foreign Exchange Dealers’ Association of India (FEDAI) will need to play a leading and constructive role in these efforts.

“In a constantly evolving world where change is the only constant, the journey of the Indian foreign exchange market over the last few decades has been one of continuous development and innovation,” he said on Sunday.

He stated that the Reserve Bank remains committed to moving forward at a steady pace in response to the changing macro-financial environment – both globally and domestically. According to the constable, as the economy grows and develops, the scope of participation in foreign exchange markets will change.

“With the increasing integration of the economy with the rest of the world, more and more entities are likely to, directly or indirectly, get exposed to foreign exchange risks. There are likely to be demands for permitting hedging of economic exposures,” the deputy governor said, adding, “While this may be tricky given the current extent of capital account convertibility, the possibility of such hedging being permitted over a period of time as we progress further down the path of capital account convertibility needs to be carefully evaluated.”