1. I wish to thank FEDAI for inviting me on the occasion of their 4th Annual Day. This is an opportune moment to look back and reflect on the developments of the last one year in financial markets and, in particular, the foreign exchange markets. The year 2020 has been one like never before. Faced with an unknown crisis which brought the global economy to a sudden stop, recent policy discourse has been dominated, and rightly so, by the impact of the pandemic. Despite this, regulatory and institutional reforms in the country have moved the domestic financial markets to the next trajectory. Cutting across market segments, these reforms are ushering in a simplified, principle-based regulatory framework that seeks to broad-base markets by easing access, enhancing participation, facilitating innovation, protecting users and promoting fair conduct. Today, I would like to discuss the imperatives and the building blocks of the recent reforms placing them in the context of the big picture of a modern and efficient financial market, equipped to support the aspirations of an open and integrated economy.
2. Given that we are still amidst the pandemic, where near-term macro concerns dominate the discourse, let me start with a few words on the macroeconomic outlook and financial market conditions.
3. After witnessing a sharp contraction in GDP by 23.9% in Q1:2020-21 and a multi-speed normalisation of activity in Q2, the Indian economy has exhibited stronger than expected pick up in momentum of recovery. The global economy has also witnessed a stronger than expected rebound in activity in Q3. The IMF has accordingly revised its assessment for global growth in 2020 to a less severe contraction than what was assessed in June 2020.
4. Even as the growth outlook has improved, downside risks to growth continue due to recent surge in infections in advanced economies and parts of India. We need to be watchful about the sustainability of demand after festivals and a possible reassessment of market expectations surrounding the vaccine. The monetary policy guidance in October emphasised the need to see through temporary inflation pressures and also maintain the accommodative stance at least during the current financial year and into the next financial year.
5. A key source of resilience in recent months has been the comfortable external balance position of India supported by surplus current account balances over two consecutive quarters, resumption of portfolio capital inflows on the back of robust FDI inflows, and sustained build-up of foreign exchange reserves. The Government’s recent policy focus to enhance India’s participation in global value chains, including through production linked incentives for targeted sectors, can leverage on the strong external balance position of India.
Financial Market Developments
6. Let me now turn to financial markets. Domestic financial market conditions were benign at the start of the year but witnessed severe stress and dislocation as the COVID-19 pandemic unfolded. Thinning out of activity impacted market liquidity. Increased volatility of financial prices was observed across most asset classes. Yields hardened in the government securities market and the yield curve steepened sharply amidst concerns about fiscal slippage and sustained sell-off by FPIs. The financing conditions in the commercial paper and corporate bond market also deteriorated, reflecting overall market conditions as well as generalised risk aversion. The Rupee sharply depreciated, with increasing volatility and heightened forward premia. The Reserve Bank acted proactively and nimble-footedly to ease financial market conditions and mitigate risks with a slew of conventional and unconventional measures. Market participants responded with alacrity and together we have been able to ensure stable and resilient markets across all segments. The Reserve Bank remains committed to fostering orderly functioning of financial markets and will continue to evaluate incoming information having a bearing on the financial markets and act, as needed, to mitigate any downside risks.
7. Over the last three decades, the pace of financial market reforms has gathered momentum, albeit occasionally interrupted by financial crises. A calibrated opening up of the Indian economy has occurred since the 1990s. Alongside, the institutional architecture has been deepened keeping in view the specifics of the country context. In the…