G-Sec Markets: Account and Outlook
It gives me immense pleasure to address this distinguished gathering of forex professionals from all over the country. Coming to these visually beautiful surroundings, it is easy to get oblivious to the fact that this state is a large contributor of ‘invisibles’ for our balance of payments. Both tourism earnings and private remittances have had a significant impact on Kerala’s economy and the state has benefited substantially as a result of liberalisation since 1991. Putting numbers to this gain, as per a study by the Centre for Development Studies, Trivandrum, the average yearly gain to the state since the start of reforms has been in the range of Rs. 2000 crore. I begin this address, Ladies and Gentlemen, in the background of this interesting perspective. Forex market in India is undergoing rapid transformation and exciting things are engaging us professionally. At the same time, it can no longer be seen in isolation – it is increasingly getting integrated within the broad ambit of financial markets. Over the last fifteen years, momentous changes have happened in the financial sector, which are well known. While the initial reforms concentrated more on the institutions like banks or non-banking financial companies, the recent years have witnessed emphasis on financial markets. With the financial markets in India acquiring greater depth and maturity in the recent years, the issue of greater integration of various market segments among themselves, on the one hand, and with the global markets, on the other, has come to the forefront. In my address I intend to take stock of the major initiatives that have been taken to reform the financial markets in India in the past, reflect on the present scenario and articulate the future course of reforms. As you all are aware, the development of financial markets in India has been pursued for bringing about a transformation in the structure, efficiency, and stability of markets as also facilitating integration of markets. The emphasis has been on strengthening price discovery, easing of restrictions on flows or transactions, lowering of transaction costs, and enhancing liquidity. During the post-reform period, the structure of financial market has witnessed a remarkable change in terms of the types, the number and the spectrum of maturity of financial instruments traded in various segments of money, gilts and foreign exchange markets. I now dwell on the three segments of the financial markets which fall directly under the purview of the Reserve Bank of India. As this is a gathering of Forex Professionals, it would be in the fitness of things to dwell on the reform process of the forex market first.
The global foreign exchange markets have grown manifold in the recent years. The latest BIS Triennial Central Bank Survey on forex and derivatives markets 2004 indicate a substantial rise in activity in foreign exchange markets across the world. Average daily turnover at US $ 1.9 trillion in April 2004 showed an increase of 57 per cent and 36 per cent at current and constant exchange rates compared to April 2001, reversing the fall in global trading volumes between 1998 and 2001. Both global factors, such as search for yield and a secular deepening in Asian financial markets contributed to the strong growth. In this context, it is important to note that the share of trading between banks and financial customers rose significantly from 28 per cent in 2001 to 33 per cent in 2004. However, the currency composition of turnover has not changed significantly. The US dollar was on one side of 89 per cent of all transactions, followed by the euro (37 per cent), the yen (20 per cent) and the Pound sterling (17 per cent). In terms of currency pairs, US dollar/euro continued to be by far the most traded...