Recent policy discussions in India have emphasised an integrated view of the government bond market, corporate bond market, currency market, and derivatives on these. All these markets, unified through arbitrage, are termed the ‘bond-currency-derivatives nexus’. In India, these markets tend to be illiquid, disconnected, and lack rationality in pricing. For many decades, the mainstream RBI strategy for these markets involved a club of banks. In imitation of genuine financial markets, a good deal of computer technology was put in. However, the heart of a financial market lies in the diverse beliefs of a diverse array of market participants. RBI chose to throw up an array of entry barriers, which prevented participation in the market. With only members of a narrow club being permitted to trade, and most of them lacking profit motive owing to being PSUs, it is not surprising that the bond-currency-derivatives nexus is underdeveloped. These problems were exacerbated by a series of other mistakes in regulation, which hindered the functioning of the market.
There is a certain sense of progress, with currency futures having found their feet and interest rate futures trading starting at NSE today. The last time interest rate futures trading was attempted, in effect it was a non-starter since RBI banned bank participation. This time, banks have been permitted some leeway. This is progress. It is quite likely that the interest rate futures product will gather momentum. At the same time, the overall policy approach on the bond-currency-derivatives nexus is riddled with problems. While currency futures trading on the US dollar has begun, all other currency pairs are banned. Currency options and swaps trading are banned. Participation by FIIs and NRIs is banned. While an RBI committee had suggested the launch of a futures contract on the call money rate, and on the 90-day treasury bill, these products have been blocked by RBI. Only the 10-year interest rate futures has been permitted. The RBI-Sebi joint committee has engaged in unnecessary micro-management, specifying every detail of the product. It is the job of government to ask car companies to control emissions, and to have brakes that work, but it is not the job of government to design cars. The ethos, philosophy, and knowledge of staff at RBI and Sebi need to be overhauled, so as to bring about a new way of thinking. That is the only way that Indian finance can eventually become world class. It’s in the interest of the future.