RH Patil, known for his work as chairman of committee on developing debt market and the Clearing Corporation of India, tells Rajesh Bhayani that his organisation expects to soon start guaranteeing forward forex deals. Excerpts:
You are credited with reforming India’s stock exchange industry by setting up the National Stock Exchange (NSE). But after a decade-and-a-half, trading is confined to a few places. Will emerging competition expand the equity cult?
Investors can be attracted to the market by keeping transaction costs low. This purpose has been achieved but Indian stock markets have, these days, become excessively volatile due to the overwhelming presence of speculative foreign investors, particularly hedge funds, and the damaging influence of P-notes. Average middle-class investors are afraid to enter the market and invest as there is too much volatility. Competition among stock exchanges is always good for investors but volatility can keep them away from the market. NSE has transformed the exchange industry. This was the result of competition. In fact, NSE was set up to take equities to rural areas, which has not happened. Hence, the purpose for which it was set up is yet to be achieved satisfactorily.
BSE is lagging far behind even after demutualization? Is this because there is no one to anchor it?
Anchor investors are those that anchor growth and are identifiable with the success and failure of the enterprise. I believe BSE and for that matter all exchanges and enterprises should have anchor investors.
There are talks that FIIs (foreign institutional investors) may be allowed in the G-Sec (government securities) market? How will this affect the debt market?
Prima facie, FIIs may help the government raise more money without crowding out the private sector. But FIIs are basically speculative in nature even in times of perceived — not necessarily real — crisis. If they desert G-Secs, as they deserted equities in hoards, it could be disastrous for the G-Sec market, putting the government’s borrowing programme in jeopardy. We should not forget the fact that the government has to raise large amounts almost every week. Entry of FIIs will make the market volatile even in normal circumstances as their investment decisions are influenced by factors that are materially different from Indian institutional investors like banks, insurance companies, PFs (provident funds), etc. The market for government securities needs special treatment as volatility can affect interest rates unduly, undermining the regulator’s control of monetary policy.
The CCIL has proposed to guarantee forward deals in foreign exchange. When will that be started?
At present, we are settling forward forex deals when they come into the spot window. We have proposed to settle and guarantee forward deals of banks and charge margins for that. RBI is examining our proposal, especially with regards to our risk containment measures. We expect that RBI will soon allow us to guarantee forex deals.
