Are we regulating risk or merely regulating market activity?

ENHANCED RBI COLLATERAL NORMS: IMPACT ON CAPITAL MARKETS

AS THE NARENDRA MODI

Government completes 12 years in office India's macro-economic indicators present a largely reassuring picture. The fiscal deficit and current account deficit remain manageable, GDP growth continues to outpace most major economies, unemployment has moderated, and inflation, despite pressures from global geopolitical tensions and elevated energy prices, remains broadly under control. The principal vulnerabilities lie in the rupee's depreciation and India's persistently high import bill.

Another area that deserves attention is foreign capital flows. Attracting sustained foreign investment requires more than favourable macro-economic conditions. Global investors allocate capital based on relative returns, and in the near term Indian equity markets have not always compared favorably with some international peers. If India wishes to attract larger and more durable flows, it must continue to strengthen the domestic investment climate, maintain a competitive tax regime, simplify compliance requirements, and nurture healthy financial intermediaries. Equally important is ensuring that regulation strikes the right balance between prudence and market development.

It is in this context that the government's recent tax reforms for foreign portfolio investors in government securities assume significance. The measures seek to create a more competitive environment for overseas investors while deepening India's sovereign bond market. Yet attracting capital requires a broader, ecosystem-wide approach. One question increasingly being asked by market participants is whether financial regulation is focused on managing risk or merely constraining activity. That debate has gained relevance with the Reserve Bank of India's revised framework governing credit facilities to capital market intermediaries, scheduled to come into effect on July 1.

The amendments are intended to strengthen prudential safeguards around bank financing linked to capital market activity. That objective is entirely legitimate; effective regulation must identify risks early and ensure that credit is deployed responsibly. The question, however, is whether the revised framework adequately reflects the actual risk profile of the entities and activities it seeks to regulate.

This issue is particularly relevant for stockbrokers, clearing members, proprietary trading firms, and other intermediaries that operate within exchange supervised and clearing corporation-backed frameworks. These entities rely on credit facilities and bank guarantees to meet exchange obligations, provide liquidity, facilitate price discovery, narrow bid-ask spreads and reduce trading for COSTS investors, including foreign portfolio investors.

 The discussion is often framed around proprietary trading, but the term covers a broad spectrum of activities. At one end are participants taking concentrated directional positions in anticipation of market movements. At the other are firms engaged in arbitrage, hedged strategies, liquidity provision and market making. Both may trade on their own account, yet their risk profiles and contributions to market efficiency differ substantially.

India's capital markets have navigated some of the most turbulent episodes in modern financial history, including the global financial crisis, sovereign debt stresses, the pandemic-induced market shock, and repeated bouts of volatility. Throughout these episodes, exchange-related credit facilities, including bank guarantees furnished by brokers and intermediaries to exchanges and clearing corporations, have generally exhibited limited instances of default relative to overall exposure. Outstanding exchange-related bank guarantees are estimated at over 1.2 lakh crore yet the segment has not demonstrated the kind of sustained credit stress typically associated with elevated lending risk.

The risk profile has also been strengthened by a series of regulatory reforms over recent years. These include upfront margin collection, peak margin reporting, daily segregation and upstreaming of client funds, restrictions on the use of client assets as collateral and intraday margin monitoring Together, these measures have significantly enhanced market discipline and reduced the potential for systemic stress.

Moreover, the entities affected by the revised framework operate within highly structured and continuously monitored environments. Transactions are subject to real-time margining, daily mark-to-market settlements, collateral requirements, and oversight by exchanges and clearing corporations. Risks are measured and managed throughout the trading cycle rather than assessed periodically. These safeguards do not eliminate risk, but they materially influence its nature and magnitude.

Banks, too, conduct independent credit assessments before extending facilities to market intermediaries, evaluating financial strength, governance standards, risk management systems, capital adequacy, and historical performance. The broader banking data provides additional context. According to RBI figures, gross nonperforming assets, 2.3% in industry and 2% in ratios, stood at 6.1% in agriculture services and 1.2% in personal loans during FY25. By comparison, NPAs associated with capital market intermediary exposures have historically remained negligible.

This is not an argument for special treatment. Rather, it is an argument that regulation should be calibrated to evidence. Financial regulation routinely differentiates between activities based on risk characteristics. There is merit in applying the same principle here. Market-linked activity is often viewed through the lens of volatility, leading to the assumption that market risk automatically translates into credit risk. In reality, the two are not always synonymous. The issue is not whether prudential safeguards should be strengthened. The RBI is right to ensure that bank credit is used responsibly. The issue is whether regulation can become more precise in distinguishing between different forms of market activity while recognizing that leverage and liquidity are essential components of well-functioning capital markets.

As the July 1 implementation date approaches, these questions deserve careful consideration. The strongest regulatory frameworks are those that align policy with evidence, encourage responsible risk-taking, and support market development without compromising financial stability. That principle should guide this debate as well.

Global investors allocate capital based on relative returns, and in the near term Indian equity markets have not always compared favorably with some international peers.

The risk profile has also been strengthened by a series of regulatory reforms over recent years

(The author is National Spokesperson, BJP)

 Indian Economy: Budget And Beyond

Written By : Gopal Krishna Agarwal,

With commitment and willpower to achieve our stated objectives, the budget will be a vision document to the goal of Viksit Bharat

Globally, there is a lot of interest around India right now. It is not surprising, given that India appears to be an island of calm amidst the geopolitical upheaval that is going on.

When countries in the world are unsure about their changing position and role in the emerging global order, India has hunkered down and focused on its economy.

With current financial year’s GDP growth projected to be above 7% and healthy growth expected to continue, India is poised to become the third largest economy of the world soon. It does not mean that there will not be challenges on the economic front.

I underline this because the current bump in GDP growth rate is a result of a number of initiatives by the Government—increased exemption limit for income tax, lowering of indirect tax under GST 2.0 reforms, successful inflation management which gave RBI a window to reduce policy rates. Thus, the low-hanging fruits for pushing up GDP growth have been plucked, and sustaining real GDP growth above 7 per cent in the coming years will require significant policy initiatives by the Government. PM Modi calling his commitment to express reform becomes vital in this context.

The upcoming annual budget is an important document and will outline India’s roadmap to Viksit Bharat beyond headlines. It is satisfying to note that the policymakers in the Government ecosystem know the challenges and acknowledge them with sincerity. We have already seen promising developments, like the notification of the labour laws, in the last few months. It shows that the Government will continue to work on the challenges that are holding back economic growth.

Nothing is more symptomatic of the failure of India’s economic planning than the abysmal share of the secondary sector in our GDP. There just cannot be equitable growth without the manufacturing sector taking off in a big way.

Though initiatives have been taken under the rubric of ease of doing business, production-linked incentives, etc., a lot more still needs to be done. Factor market reforms need to extend to land and capital. Land ownership and transfer needs digitisation fillip, and land acquisition and land use change needs to become easier. We have successfully implemented digital public infrastructure, but digitisation of land records is still a work in progress. Policy gaps crippling manufacturing units in the MSME sector will be addressed for it to become globally competitive and take full benefit of several FTAs that we have signed.

Our manufacturing is still capital intensive, in spite of an abundance of labour. Hopefully, implementation of the labour code will correct the balance, but still, uniformity in labour regulations across States is a must. The Central government will ensure that the objective of codification is not defeated by differences in State-level regulations, but States have to come on board. Custom Duty reduction and process simplification are on the cards, and ideas like quality control orders (QCO) are given up. At a time when the government is successfully negotiating free trade agreements (FTA) such as with the European Union, which is the eighth in line, it is equally important to ensure that we position our manufacturing sector to benefit from it.

With the continued government focus on fiscal consolidation and the private sector investment still to pick up in a big way, the government sure will continue spending on capital expenditure. The Economic Survey has pointed out that bringing disinvestment back on the agenda will have a reassuring effect on the economy; its suggestion to amend the definition of Government Company in the company law, bringing the requisite government’s shareholding to 26%, is welcome. It would not only provide resources for high public capex, it will also signal the government’s firm commitment to continued economic reforms and generate an additional source of revenue to the government.

The trickle-down effect of economic growth alone cannot bring equity of income, because of varying educational and health standards in the country, our focus should shift to a bottom-up approach, utilising India’s cultural diversity, particularly handicrafts, cottage industries and in areas like art, music, dance, food, festivals, etc. Skilling and establishing financial connect with artisans in rural areas will bring prosperity to remote villages. Monetisation and creation of value for the practitioners with e-commerce and digital transactions will see our country’s cultural economy as a new catalyst to propelling growth in our country. It is a vital intangible resource that remains largely untapped.

India is witnessing exemplary growth in Southern and Western States, and States in the North are also doing reasonably well. The Government’s extra attention to states and regions in the East—Bihar, Jharkhand, Chhattisgarh, Orissa, and Eastern Uttar Pradesh—will bring balanced geographical growth.

A plan for these States in the upcoming budget on the lines of ‘aspirational districts’ could be a good starting point. These states/regions offer cheap land and labour, proximity to the energy source of coal can help them grow as good manufacturing centres.

With commitment and willpower to achieve our stated objectives, the budget will be a Vision document to the goal of Viksit Bharat.

Gopal Krishna Agarwal is the National Spokesperson of BJP for economic affairs.

Current geopolitics on trade and tariff and India’s economic interest

Gopal Krishna Agarwal,

The recent churn in global trade and geopolitics has exposed the limits of sentiment-driven diplomacy and forced nations to reassess long-held assumptions about strategic partnerships

The last few months have upended not only global trade but also long-held beliefs in international relations. Despite being strategic partners and natural allies, we see that many countries' policies, particularly those of the US, are not conducive to India's global positioning and current stature. Though the Indo-US trade talks are back on track after hitting a rough patch, Indians should not be too surprised by any future shocks. The US has put restrictions on the H-1B visa and the withdrawal of the exemption to the Chabahar port in Iran, both of which disproportionately affect Indian interests. Our surprise at these developments reflects on our lack of perspective on geopolitics and geo-economics.

Global geopolitics is given. Every country is pursuing its national interests. An overlap of interests in one area does not mean that the first country will not pursue its interests in matters that might put it in an adversarial position with some of its partners. Pursuance of one's own national interest also involves actively undermining the economic, strategic and political interests of other countries.

India must first and foremost decide its national interests. It includes rapid economic growth, social stability, peace within its borders, and the maintenance of credible deterrence along its land borders in the north, east, and west. Our national interest also lies in maintaining strategic autonomy, for which we need to insulate ourselves from hostile actions by global powers in the domain of energy (oil and gas), semiconductors, rare earth materials, pharmaceuticals, defence platforms, etc. Some of these need to be achieved through the doctrine of aatmanirbharta, irrespective of the financial costs involved. For others, we need to cultivate our relations with other countries and strengthen multilateral platforms.

No doubt, the US have bruised Indian self-respect and ego, and there is a shared sense of betrayal among the citizens; however, the path of retaliation is not a prudent strategy. India has already done enough to show that global players would not dictate it on matters of its national interest. We do not depend on external security cover. We have continuously reduced our dependence on foreign sources in defence relations, especially in the purchase of offensive platforms that require constant support for operations and maintenance. Except for energy, all other areas of engagement are expected to remain unaffected.

America and European countries remain important to India. As a free, democratic, and secular society, India is a natural ally of the US and other G7 and G20 countries. Until we have a trade deal with the US, our FTAs with countries like Germany, the United Kingdom, New Zealand, Oman, the UAE, Australia, Latin America, and the Eurasian Economic Union are bound to benefit our economy. This is already evident in the increase in our exports, robust GDP growth, and IIP manufacturing-sector numbers.

But to take full benefit of FTA, our first focus should be on domestic reforms and strengthening our manufacturing sector, particularly the MSME segment. It was already a work in progress and a focus area for the government, but the trade imbroglio with the US has added urgency. It is an undeniable fact that the Indian manufacturing sector still needs to cover a lot of ground to be globally competitive. India could not fully take advantage of its earlier FTAs with countries such as Japan and South Korea because of this limitation. The recent Goods and Services Tax (GST) Next Gen 2.0 reforms and other important steps, such as deregulation and Labour Code notifications that reform factor markets, will ensure that our economy continues to withstand global shocks and move ahead as the fastest-growing large economy in the world.

India has always been a strong proponent of multilateralism and a rules-based international order. The current cold phase in global relations gives India the opportunity to focus its time and attention on protecting and promoting multilateral platforms and organisations. A world divided into small camps with competing bilateral relations is neither conducive to economic growth nor to global peace. Bilateral free trade agreements (FTAs) have become a rage, and we too are negotiating several FTAs, but we should not forget to protect the interests of the Global South, most of which would not be able to negotiate fair bilateral trade agreements with the Western block.

India is not beholden to any great power and will never act as a hired gun. This might come as a disappointment to some countries, but they must understand the psyche of the Indian state and modify their expectations accordingly. We might have some overlap with China right now, but given the ruthless pursuit of its own interests and its strategic culture and history, China might try to lull us into complacency and then give us a rude shock later.

A unique feature of hotly contested domestic politics in India was a near-consensus on international matters. With an irresponsible opposition that fails to draw a boundary between political and national interest, that aspect of consensus is, regrettably, missing right now. Domestic political compulsions in such cases may limit the options of the Government to take a strong stand on foreign affairs. Thankfully, Modi Government, in pursuance of India's national interest, is not constrained by petty domestic political considerations.