India's Markets Show Resilience Amidst Economic Uncertainty, RBI Governor Warns of Future Challenges

India's Financial Markets Show Resilience Amid Global Uncertainty

India's financial markets have demonstrated remarkable resilience amid global uncertainty, but the next phase of growth will depend on deepening liquidity, broadening participation, and strengthening market infrastructure, according to Reserve Bank of India Governor Sanjay Malhotra.

Speaking at the 25th FIMMDA-PDAI Annual Conference in Amsterdam, Malhotra noted that the Indian economy has remained among the fastest-growing major economies since the pandemic, supported by strong macro fundamentals, structural reforms, and prudent policy management. The economy grew at an average of 8.2 per cent during 2021-25, with 7.6 per cent growth estimated for 2025-26 and 6.9 per cent projected for 2026-27.

The Indian economy's growth has been underpinned by low inflation, with headline CPI projected at 4.6 per cent for FY27. Fiscal consolidation is progressing through improved tax buoyancy and better quality of expenditure. The banking and NBFC sectors have strengthened balance sheets, and corporate bond issuances have broadened financing channels beyond bank credit. On the external front, foreign exchange reserves cover 11 months of imports, and gross FDI is expected to rise to about USD 90 billion in 2025-26.

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Turning to financial markets, Malhotra highlighted several measures undertaken by the RBI to enhance efficiency and transparency. These include an agile liquidity management framework, extension of the benchmark issuance strategy to State Development Loans from FY27, and the introduction of total return swaps on corporate bonds and derivatives on corporate bond indices to aid credit risk management. The RBI has also rolled out forward contracts on government securities, which are being increasingly used by long-term investors like insurers.

On market infrastructure, the RBI has expanded central clearing for FX forwards up to 36 months, introduced electronic trading platforms for forex options, and implemented initial margin regulations for non-centrally cleared derivatives. Transparency has been improved through mandatory reporting of OTC rupee derivatives and FX trades. For foreign investors, the RBI has eased FPI norms for corporate bonds, expanded the Voluntary Retention Route, and permitted non-residents to open rupee accounts in their own regions.

Enhancing liquidity across all G-sec tenors, broadening OTC interest rate derivatives beyond a few products, encouraging Indian banks to evolve as global INR market-makers, expanding usage of the FX Retail platform for retail users, and developing the credit derivatives market, which remains underutilised are the five key areas that have room for improvement, according to Malhotra.

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The Governor stressed that while banks and primary dealers enjoy privileged access to liquidity facilities and market-making rights, they also carry the responsibility to ensure fair, transparent and inclusive access for all users.