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Reading: Financial Innovation


Susan Thomas has an excellent presentation on why our financial system is practically archaic; the licence raj still exists there and stifles all innovation. (Source: Ajay Shah)

The license-permit raj in Indian finance

  • No new domestic banks can start operating without RBI

  • All foreign banks put together can start 18 branches a year.
  • Only banks and PDs can become members of the bond exchange.
  • Banks are banned from trading in equity derivatives or commodity derivatives.
  • Currency futures / interest rate futures are not permitted.
  • Wheat (and several other commodity) futures are banned.
  • Credit derivatives are banned.
  • Lending government bonds is banned.
  • Repos on corporate bonds are not permitted.
  • Covered interest parity arbitrage is mostly blocked for banks and impossible for everyone else.
  • Two companies are not permitted to do an OTC derivatives transaction against each other. One counterparty has to be a bank.

We need to free controls and create better markets. What’s the point of a system that refuses to promote liquidity, and transactions? There have been problems worldwide, but that is so in EVERY market – equity, bond, commodities – we haven’t stopped trading them altogether have we? It’s time to learn and implement rules that promote markets but regulate – instead of ditching markets altogether. Will RBI let up?

Nothing will change until after the next elections. RBI isn’t doing much to control inflation, and hopefully is starting to hit the dollar now – it’s dropped from 43.2 to 42.8 in the last five days.

Time for a more liberal market regime, and while the time for it was last year, it’s not too late even now.


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