Role of the RBI in the financial market

The RBI plays the following role when it comes to the fi nancial markets of a country.

1. Ensuring stability of infrastructure and growth

The financial markets play a very important role in the financial system and only a few organizations
in the country have the authority and resources to ensure its stability; one of these organizations is
the RBI. A financial market infrastructure (FMI) is a multilateral system of participating institutions
whose operator provides for the clearing, settlement and recording of payments, securities,
derivatives or other financial transactions. IMFs include PAyment systems, CSDs, securities settlement
systems, central counterparties, trade repositories (an entity that maintains electronic records of
transaction data), etc.

It is essential that these functions operate as well as possible and that the appropriate infrastructure
is in place, because financial markets are channels that concentrate risk in the economy, which, if not
properly managed, can transmit shocks to the whole economy. To meet these challenges, the RBI is
setting up organisations and committees to monitor and develop the infrastructure of the financial
market.

Some of these infrastructures include Securities Settlement System (SSS), Real Time Gross Settlement
System (RTGS), Clearing Corporation of India (CCIL), Consistent Dealing and Order Matching System
(NDS-OM), etc. NDS-Om, for example, owned by the RBI, is an options-based electronic trading
system for government securities. NDS-OM accounts for 90% of government bond trading volume.

2. Enabling the growth of payment systems in India

The RBI monitors the operation of these payment infrastructures to ensure their effectiveness and the
safety of participants. This role is becoming increasingly important, especially as the country is under
pressure to adopt an electronic payment system and comply with international trends.

This is possible only because the RBI ensures the security, efficiency and availability of payment and
settlement systems across the country.
3. Oversight of payment and settlement systems
The RBI assigns certain functions to the various other institutions it establishes to regulate and
oversee the system. The RBI is also in the process of setting up the legal framework that will govern
these arrangements. For example, the RBI has created the PSS (Payment and Settlement Systems Act,
2007).

The Act enables the RBI to lay down norms on the format of money orders, time limits, mode of
transfer of money, etc. The RBI is also authorized to access all information regarding the operation of
a payment system, to enter and inspect all premises where the payment system is operated, and to
conduct audits and inspections.

4. Regulation of OTC derivatives

The trade repositories for over-the-counter derivatives have been set up under the aegis of the RBI
and fall under two separate regulatory packages – the Reserve Bank of India Act 1934 and the Futures
(Regulation) Act 1952.

OTC derivatives here include interest rate swaps, forward rate agreements, currency swaps, cross-
currency swaps, currency options, cross-currency options.

5. Other RBI functions

The RBI can influence the money supply by regulating the deposits, reserves (SLR and CRR) that banks
have to keep and the interest rates it charges to commercial banks seeking to borrow money. These
rates and requirements evolve according to the needs of the economy.

The RBI also plays an important role in stabilising the value of the Indian currency by holding precious
metal and foreign exchange reserves. Another important aspect emphasised by the RBI is the control
of its arch enemy – inflation.
Final thoughts
Today we have discussed the role of the RBI in the financial market. Over the past 85 years, the RBI
has grown into one of the largest and most trusted organizations in the country. This is still evident
today when we look at the RBI in difficult times when the economy is vulnerable to global and
domestic turbulence.

The RBI not only increases the scale of growth and scope of the Indian economy, but also ensures that
the internal operating environment of the Indian financial markets is stable, robust and evolves in line
with global standards.