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: In the early 1990s, two different strategies in financial reform were attempted. With the bond market and the currency market, the approach taken at RBI was that of setting up a closed club of banks and a few others. Trading took place largely through informal conversations. There was no transparency. When corporations needed to buy bonds or currencies, they had to deal with only banks, and banks earned a rent on their monopoly. Foreigners and non-banks were blocked from the market. RBI directly built market infrastructure, such as the NDS, a bond exchange. The alternative strategy was taken up by the equity market. This involved fostering competition and removing barriers to access. The two exchanges competed, there was full transparency, good computer technology was used. The most important point was that all participants were welcomed, including foreign brokers and foreign investors. In 2008, the results are visible: the equity market blossomed while the bond and currency markets did not. A key recommendation of the Percy Mistry and Raghuram Rajan reports lies in the creation of the bond-currency-derivatives (BCD) nexus. This is the integrated system of markets covering goverment bonds, corporate bonds, currencies, and their derivatives. The regulatory and supervisory responsibilities for this are best placed with Sebi, both because the central bank should focus on monetary policy, and because Sebi has the correct skills drawn from the remarkable success of the equity market.
The first building block of the BCD nexus is currency futures trading, which has begun on the NSE. This is only a few days old, but the early results are promising. The activity levels are as yet a far cry from the equity market, but they are interesting: on Friday, there were 6.2 orders per minute and 2.7 trades per minute. In these early days, the daily turnover has been roughly Rs 170 crore. The transparency of this market is an unprecedented new development: for the first time, thus ensuring customer protection. While this market is not big enough to support the trading requirements of large corporations, it is ready for transactions of up to $100,000, which reflects the needs of a large number of the smaller players in the system. So far, RBI and Sebi have put five constraints on this market. FIIs, NRIs, options and swaps, currencies other than the dollar and positions larger than $5 million are all banned. When these bans are removed, activity...
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