Market power comes with responsibility, RBI governor tells banks, PDs

In a pointed message to financial market intermediaries, Reserve Bank of India Governor Sanjay Malhotra cautioned that the privileges enjoyed by banks and primary dealers (PDs) come with clear obligations to ensure fairness and access across markets.

“...market participants must acknowledge that while a privilege bestows some benefits, it also entails responsibilities,” Malhotra said, adding that banks and PDs enjoy exclusive access to liquidity facilities and short-term money markets, and act as market-makers in over-the-counter (OTC) derivatives.

“These privileges accord immense market power to the PDs and banks, which is beneficial for their growth.” However, he stressed that this market power must be exercised responsibly.

“There are corresponding responsibilities to ensure that every user has easy access to financial markets, to ensure that every user can transact on fair and transparent terms, irrespective of size and sophistication and to protect, promote and sustain market integrity,” he said.

While acknowledging that markets have ‘matured considerably,’ Malhotra flagged persistent issues such as limited product diversity in interest rate derivatives and underdevelopment of credit derivatives.

He also pointed out that Indian banks continue to deal largely with offshore market-makers rather than end-users, urging them to evolve into global market-makers if onshoring of the rupee market is to succeed.

Malhotra also called for greater retail participation and improved access, saying that the foreign exchange retail platform remains underutilized and should be prioritized by banks to ensure ‘a fair deal’ for smaller users.

Policy push

He said that the central bank stands prepared to deploy appropriate policy measures, as warranted, to mitigate spillovers and ensure orderly market conditions but it cannot do this alone.

“Strengthening financial resilience is a collective and shared responsibility. Institutions such as trade repositories will have to improve data quality and availability to support risk assessment and effective policymaking. FIMMDA and PDAI will have to play a vital role in strengthening market conventions, standardization, and discipline,” he said.

FIMMDA is a voluntary market body for the fixed income, money and derivatives markets and PDAI was formed as an association for PDs accredited by RBI to represent their interests and evolve suitable market practices for participants which is essential for proper functioning and healthy development of the market.

“I am confident that with continued collaboration among all of us, Indian financial markets will mature further,” he added.

On the development front, the RBI has taken multiple steps to deepen markets, including expanding central clearing in forex derivatives, introducing new instruments such as total return swaps on corporate bonds, and easing norms for foreign portfolio investors. Measures to enhance transparency including broader reporting of OTC derivative transactions have also been rolled out.

Despite global uncertainties, from geopolitical tensions and elevated public debt to volatile energy prices, the governor highlighted India’s macroeconomic resilience, supported by strong growth, contained inflation, and stable external balances.