Reliance on derivatives not the best way to achieve market depth, liquidity, says SBI Chief

For further deepening of the capital markets, there was a need to widen the pool of listed companies and encourage more spot transactions for price discovery, rather than having reliance on derivatives, Challa Sreenivasulu Setty, chairman, State Bank of India said on Friday.

“The way forward for India is to be self-sufficient in efficient mobilisation of savings through the capital markets. The reliance on derivatives is not the best way to achieve depth and liquidity. To this end the recent measure by SEBI to curb the access to derivatives is a step in the right direction,” Mr. Setty said virtually in his keynote address at SAMVAD summit organised by the Securities & Exchange Board of India (SEBI) in Mumbai,

He said India must devise mechanisms so that private placements must lead to more open offers and India must strive for better use of technology to reduce cost and enhance investors’ education.

“We must strengthen investor protection and how the Investor Protection Fund should evolve under the emerging circumstances. Developing capital market is a long-drawn process,” he said.

Stating that capital markets were indispensable for the growth of any economy, Mr Setty said that the capital markets would play an important role for realising the national goals.

He said by 2036 India would require to mobilise ₹1,094 lakh crore and grow at a an average rate of 8% to 9% till then to realise the dreams.

“Looking ahead capital markets will also play even a bigger role by mobilising more private capital for key sectors with financing needs,” he said.

He said domestic savings rates must rise from the present level by atleast 350 basis points (bps) to 33.5%. “Capital markets must gear up to provide additional savings to the tune of 3.5% of the GDP over and above what is coming today,” he said adding this money will come from those who are young and have greater risk appetite.

“Money should be channelised for productive use and not to the derivatives segment as has been the trend in recent years,” he pointed out.

Emphasizing that India capital markets have today supplemented the banks and financial institutions to fund capital needs of India, Mr Setty said some money outflows [by Foreign Portfolio Investors] were being balanced out by domestic inflows.

“Indian capital markets have deepened significantly with domestic institutions and insurance companies commanding significant Assets Under Management (AMU) thereby countering the foreign outflows of capital in a significant way,” he said.

“Today there is significantly greater access to pool of capital than what was there a decade ago. Well functioning capital markets are crucial to accelerate economic growth, broaden prosperity and reduce poverty,” the SBI Chairman stated.

He said deeper equity and debt markets could be more effective in helping mobilise and deploy domestic savings thereby complementing traditional bank lending by fostering long term investments.

“Vibrant capital markets can protect the Indian economy from volatile fluctuations of capital flows and reduce dependency on foreign debt,” he emphasized.