Capital markets provide financial resources for the long-term sustainable development of the economy, therefore it is considered an important element in the macro-financial policy toolkit, Acharya said.
He was delivering a speech on Development of Viable Capital Markets – The Indian Experience’ at Indian School of Business, Hyderabad.
The US-based economics professor, who resigned as RBI Deputy Governor earlier this month – six months before the scheduled end of his term in office – said capital markets are also vital to reach the objectives such as financial stability and the transmission of monetary policy.
“There has been a conscious and continuous effort by the Reserve Bank to expand the investor base and thereby liquidity of the markets it regulates, while preserving financial stability,” Acharya said.
He said the investor base of India’s G-Secs (government securities) has expanded over the past decade in the form of increase in the share of holdings by insurance companies and corporate, while there has been a corresponding decrease in share of holding by commercial banks.
In parallel, calibrated access for global investors through the FPI route is helping broaden the investor base, while also bringing in diversity of trading views and strategies, he said.
The Committee on Global Financial System (CGFS) had constituted a working group in 2018-19 to examine global trends in capital market development.
It was also tasked to identify various factors, including legal, institutional, structural and conjunctural, that foster development of robust capital markets and consider the role of policy.
The working group, co-chaired by the People’s Bank of China (PBOC, Li Bo) and the Reserve Bank of India (RBI, Viral V Acharya), focussed on issues, primarily related to the development of markets in bond and equity securities.
The CGFS report has identified two types of drivers of capital market development. One that creates an enabling environment for financial development and second, which are more capital market specific such as easy access to high-quality material information, diversity in investor base, and efficient market ecosystem for trading, he said.
On the policy front, Acharya said there is an enabling environment with the macroeconomic stability factors in place due to stable growth and low inflation.
Among others, Acharya said promoting market autonomy through rationalising regulatory guidelines and procedures, development of financial market institutions and infrastructure, and macro-prudential management of investment restrictions for domestic and foreign investors are the factor that have come from the policy front to develop the capital market in India.