Financial Markets

RBI proposes Daily Financial Conditions Index

Context: The Reserve Bank of India (RBI) has proposed a daily Financial Conditions Index (FCI) to enhance real-time monitoring of India’s financial health.

Relevance of the Topic: Prelims: Key facts about Financial Conditions Index.

Daily Financial Conditions Index

The FCI is a composite index proposed by the RBI to track real-time financial market conditions in India on a daily basis.
It is designed to capture and reflect the prevailing conditions across key segments of the financial system including-
- Money market
- Government securities (G-sec)
- Corporate bonds
- Equities
- Foreign exchange market
The index aims to provide a high-frequency measure of how tight or easy financial market conditions are, relative to their historical average since 2012.

Features of Financial Conditions Index

The FCI is built using 20 market-based indicators.
The FCI is standardised- meaning values are shown in standard deviations from the average (since 2012).
The proposed FCI traces movements in financial conditions in India across both periods of relative calm as well as crisis episodes.
- Higher positive FCI indicates tight financial conditions.
- Lower negative FCI indicates easy financial conditions.

Objective of daily Financial Conditions Index

To provide a real-time, daily assessment of India’s financial environment.
To help policymakers, analysts, and market participants understand how monetary and financial conditions evolve.
To track stress or buoyancy in different financial market segments.
To improve timely policy responses during periods of financial turbulence or boom.

Implications

Helps RBI assess how financial markets respond to interest rate or liquidity changes.
Works as an early warning system for economic stress.
Supports data-driven decision-making in fiscal and monetary policy.

Key Events Tracked by the Financial Conditions Index

The FCI has effectively captured major episodes of financial stress and easing in India:

Taper Tantrum (2013): Financial conditions tightened significantly due to fears of the US Federal Reserve reducing its bond purchases. This led to capital outflows, a falling rupee, and rising bond yields.
IL&FS Crisis (2018): The default by IL&FS caused panic in the bond market, increased credit risk premiums, and led to tighter financial conditions.
COVID-19 Outbreak (2020): The onset of the pandemic triggered a severe tightening of financial conditions due to a sharp sell-off in equity and corporate bond markets.
Post-COVID Period (2021-2022 ): The index suggests that in the aftermath of the pandemic, exceptionally easy financial conditions were driven by the combined impact of amiable conditions across all market segments.
Mid-2023 to Early 2025: Conditions remained largely easy, backed by buoyant equity markets and surplus liquidity, before tightening from November 2024 due to global policy shifts.
March 2025: FCI peaked again briefly but later normalised, indicating a return to near-neutral financial conditions.

Kisan Credit Card bad loans rise by 42% in four years: RBI

Context: Recently, in an Right to Information (RTI) request reply, the Reserve Bank of India informed that the outstanding NPA amount in the Kisan Credit Card (KCC) segment surged to Rs 97,543 crore as at end of December 2024.

Relevance of the Topic: Prelims: Kisan Credit Card; Non-Performing Assets in KCC segment.

Major Highlights:

Among all other agriculture loans offered by banks, such as tractor or food and agri-processing loans, the highest amount of delinquencies are seen in the Kisan Credit Card (KCC) segment.
- Scheduled commercial banks, excluding regional rural banks, have seen a sharp increase of 42% in bad loans in KCC accounts, during FY21-FY25.
- Outstanding NPA amount surged to Rs 97,543 crore at the end of December 2024, compared to Rs 68,547 crore at the end of March 2021.
Amount outstanding in operative KCC accounts across all banks (SCBs, cooperative banks and RRBs), has risen from Rs 4.76 lakh crore in FY22 to Rs 5.91 lakh crore as of December 2024. This reflects stress in the agriculture sector.

NPA classification in the KCC segment

In case of a retail loan, an account becomes an NPA if interest and instalment of principal remain overdue for more than 90 days.
The repayment period for KCC loans is as per the crop season (short or long) and marketing period for the crop.
- The crop season for states is decided by the respective State Level Bankers Committee (SLBC).
- For short duration crops, the crop season is 12 months and for long duration crops it is 18 months in most states.
If a KCC loan is not paid within three years of disbursal, it is classified as NPA.

Factors for rise in defaults in KCC segment:

Inability of farmers to repay loans due to weather-related damages to crops.
Lack of awareness among farmers about repayment timelines.
Delay in payments due to exigencies related to personal household requirements.
Weak loan recovery mechanism for banks.
Expectations of farm loan waiver; Borrowers choose to default strategically in anticipation of future bailouts.

Kisan Credit Card (KCC) scheme

Introduced in 1998, KCC scheme provides timely access to institutional credit to small and marginal farmers for agricultural and allied activities.
KCC offers credit support for:
- Cultivation and post-harvest activities.
- Working capital for essential farming equipment.
- Investment credit for allied activities (animal husbandry, dairying, fisheries, and other agricultural extensions).
- Meet household consumption expenses.
Key Features:
- Banks provide collateral-free loans up to Rs 2 lakhs under KCC scheme.
- KCC offers a revolving cash credit facility, allowing farmers to withdraw and deposit funds multiple times, without any restrictions.
- KCC loans come under the priority sector lending (PSL) for banks. Of the overall PSL target of 40%, banks are mandated by RBI to allocate 18% of their funds towards agriculture lending.

Modified Interest Subvention Scheme under KCC

Modified Interest Subvention Scheme (MISS) offers concessional Short-term Agri-loans to farmers through KCC, up to Rs 3 lakh at a concessional interest rate of 7% per annum.
An additional 3% subvention is provided for timely repayment, reducing the effective rate to 4%.
MISS also includes post-harvest loans against Negotiable Warehouse Receipts (NWRs) for small farmers with KCCs.
In the Budget 2025-26, the government announced to increase the loan limit under the MISS from Rs 3 lakh to Rs 5 lakh.

A 2019 report of an RBI working group to ‘Review Agriculture Credit’ cited that loan waivers impact the credit flow to agriculture due to moral hazard among both beneficiaries and non-beneficiaries. This essentially leads to banks reallocating lending to lower risk borrower segments, and thus reducing credit availability for the agriculture sector.

SEBI to ease norms for Social Stock Exchanges

Context: Securities and Exchange Board of India (SEBI) has proposed a new framework for Social Stock Exchanges with changes in the definition of Not-for-Profit (NPO) organisation and expansion of eligible activities to be identified as social enterprise.

Relevance of the Topic:Prelims: Key facts about Social Stock Exchanges.

What are Social Stock Exchanges?

Social Stock Exchange (SSE) is a separate segment of the existing Stock Exchange that can help Social Enterprises to raise funds from the public through the stock exchange mechanism.
The primary goal of an SSE is to channel funds towards entities that create measurable social impact.
Objectives:
- Regulated platform that connects social enterprises and potential donors.
- Facilitate funding for the growth of social enterprises.

Eligibility for Registration on SSEs

Social Stock Exchange identifies the following two forms of social enterprises (SE): Not-for-profit organisation and For profit social enterprise.

Not-for-profit Organisations (NPOs)	For Profit Organisations
Not for profit organisations are either charitable societies registered under the Societies Registration Act, 1860 or company incorporated under section 8 companies under Companies Act 2013.	For-profit company is any company under the Companies Act, 2013, operating for profit and does not include a company incorporated under section 8 of the Companies Act, 2013.
A Not-for-Profit organisation may raise funds on Social Stock Exchange through: - Issuance of Zero Coupon Zero Principal Instruments. - Donations through Mutual Fund Schemes.	A For Profit Social Enterprise may raise funds through: - Issue of equity shares - Issue of equity shares to mutual funds - Issue of debt-instruments
Zero Coupon Zero Principal Instruments shall be issued only by a Not-for-Profit Organisation registered on a Social Stock Exchange.	For-profit organisations cannot issue Zero Coupon Zero Principal bonds.
The instruments issued by Not-for-Profit Organisations are not available for trading in the secondary market.	Instruments issued by For-Profit Organisations are available for trading in the secondary market on respective platforms of the Stock Exchanges, on which they are listed.

Ineligibility: However, corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure, and housing companies, except affordable housing, shall not be eligible to be identified as a Social Enterprise. NPOs would be deemed ineligible if dependent on corporates for more than 50% of its funding.

Zero Coupon Zero Principal (ZCZP) Instruments:

ZCZP bonds differ from conventional bonds in the sense that it entails zero coupon and no principal payment at maturity.
For ZCZP issuance, the minimum issue size is presently prescribed as Rs 1 crore and minimum application size for subscription at Rs 2 lakhs.

Proposed easing of norms for Social Stock Exchanges

1. Expanding definition of NPOs:

Currently, an NPO means:
- Social enterprise registered under a charitable trust registered under Indian Trusts Act, 1882 or under the public trust statute of the relevant State.
- Charitable society registered under Societies Registration Act, 1860.
- Company incorporated under Section 8 of Companies Act, 2013.
Expanded definition includes:
- Trusts registered under Indian Registration Act with relevant sub registrar.
- Charitable society registered under the society registration statute of the relevant State.
- Companies registered under Section 25 of the Companies Act, 1956.

2. Expanding Eligible list of activities: List of activities to be eligible as a social enterprise will include:

welfare of disadvantaged children, women, destitute, elderly and disabled;
vocational skills
promotion and education of art, culture and heritage.

3. Expanding Target Segment: Target segment may be expanded to include cultural and environmental ecosystem entities, in addition to social entities.

4. Easing conditions for renewal of registration:

Several NPOs register with SSE and do not graduate to listing or renewing the registration. This is due to the cost of annual reporting, including the social impact assessment of significant programmes.
Now, NPOs shall be permitted to register with SSEs for two years without raising funds through SSEs.

5. Condition of business income:

SEBI has proposed to prescribe the condition of business income of more than 20% of revenues in the latest annual year for the For-Profit Social Enterprises or Not for Profit Social Enterprises. This is done in order to comply with the criteria of 67% of activities qualifying as eligible activities.

Sovereign Gold Bond Scheme

Context: The Union government is considering discontinuing the sovereign gold bond scheme due to the high cost of financing the scheme. The recent developments like reduction of import duty on gold in the Union budget 2024-25, have raised the questions over the effectiveness of the SGB scheme.

Relevance of the Topic: Prelims: Features of Sovereign Gold Bonds.

What are Sovereign Gold Bonds (SGBs)?

Definition: SGBs are government securities (debt securities) denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
Key Features:
- Denomination: One gram of gold and in multiples thereof.
- Minimum investment: One gram with a maximum limit of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government.
- Interest rate: 2.50 per cent (fixed rate) per annum on the amount of initial investment.
- Maturity Period: 8 years
- Lock-in Period: 5 years
The money raised through SGBs is counted as part of Fiscal Deficit.

Rationale of Sovereign Gold Bonds scheme:

To encourage citizens to invest in gold bonds. This would reduce the demand of physical gold and thus reduce gold imports. (Gold imports are a significant contributor to India’s trade deficit).
To shift a part of the domestic savings used for the purchase of physical gold into financial savings.
To bring the idle gold lying with Indian households into the economy.

Who can invest in the SGBs?

Persons resident in India as defined under Foreign Exchange Management Act, 1999.
Eligible investors include individuals, HUFs, trusts, universities and charitable institutions.

Who are the authorised agencies to sell SGBs?

Bonds are sold through offices or branches of:

Nationalised Banks
Scheduled Private Banks
Scheduled Foreign Banks
Designated Post Offices
Stock Holding Corporation of India Ltd.
Authorised stock exchanges

Benefits of Sovereign Gold Bonds:

Alternative to Physical Gold: SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated.
Interest Earnings: Investors earn an interest of 2.5% per annum which is payable semi-annually on the investments.
Market-Linked Returns: The redemption price is linked to the prevailing gold market price which ensures the gains from price appreciation.
Loan Facility: SGBs can be used as collateral for loans as it offers financial flexibility.
Liquidity: It also provides the option for premature redemption from the fifth year as well as tradability on stock exchanges.
Tax benefits: SGBs are taxable as per the provisions of the Income-tax Act, 1961. The capital gains tax on redemption of SGB to an individual has been exempted.

Challenges and Concerns with SGBs:

High Financing Costs: There are concerns that the cost of financing the fiscal deficit through SGBs is quite high and does not align with the benefits accruing to investors from the scheme.
Reduced SGB Value: The government in Budget 2024-25 has reduced the gold import duty from 15% to 6%. As the price of gold has decreased due to lower import duty, the value of SGBs, which are linked to gold prices, has also declined. This has made SGB less attractive.
Reduced Demand of SGB: Due to diminishing demand for SGB, the government has reduced the number of SGB issuances from 10 tranches per year to just two. In the current fiscal year (2024-25), no issuance of SBG has taken place so far.
Limited Tax Base: Despite the government's efforts to reduce physical gold holdings, there has been limited success in expanding the investor base for gold bonds.

What are Alternative Investment Funds (AIF)?

Context: Alternative Investment Funds (AIFs) have emerged as a key instrument for high-net-worth individuals and institutional investors in India as they facilitate investment in high-risk, high-return ventures. However, concerns have surfaced regarding their misuse to bypass financial regulations.

Relevance of the Topic: Prelims: Key facts about Alternative Investment Funds.

About Alternative Investment Funds (AIFs):

Definition: AIFs are private investment vehicles that pool funds from sophisticated investors for investment in start-ups, infrastructure, and other high-return avenues, regulated by Securities and Exchange Board of India (SEBI) under AIF regulations, 2012.
Eligibility: Minimum fund corpus of ₹20 crore; Individual investments must exceed ₹1 crore.
Significance: AIFs contribute to economic growth by funding critical sectors like infrastructure and start-ups, and they attract foreign and domestic capital.
Types of AIFs in India (as per SEBI):
- Category I: Invest in start-ups, infrastructure, social ventures.
- Category II: Includes private equity funds and debt funds.
- Category III: Hedge funds and other complex strategies for short-term returns.

	Mutual Funds	Alternative Investment Funds (AIFs)
*Investors*	Retail investors with low investment size	High Net Worth Individuals and institutional investors with a minimum capital of ₹1 Crore.
*Risk*	Relatively lower due to diversified portfolios and strict regulatory norms	High risk investments, typically targeting categories with high-returns
*Nature of products*	Standard products for all Investors	Customised and Niche products
*Regulation*	Heavily regulated by SEBI under Mutual Funds Regulations, 1996.	Regulated by SEBI (under AIF regulations, 2012) but less stringent than mutual funds.

Key Laws Governing Financial Sector:

SEBI Act (1992): Focuses on investor protection and regulation of securities markets.
Insolvency and Bankruptcy Code (2016): Provides framework for resolving corporate insolvency.
Foreign Exchange Management Act (FEMA, 1999): Manages foreign exchange market and regulates cross-border investments.

Challenges with AIFs:

Circumvention of Regulations:
- Misuse of AIFs to bypass financial regulations in areas like Non-Performing Assets (NPA), Insolvency and Bankruptcy Code (IBC), and foreign exchange laws.
- Recently, ₹1 lakh crore of AIF investments (~20%) flagged for regulatory concerns.
Investor Protection:
- Industry's call for lighter regulations vs. SEBI's mandate for robust investor protection.
- Concerns over conflict of interest in valuation practices.
High Costs: The small number of AIF investors makes compliance and accreditation costs prohibitive.

Regulatory Framework and SEBI’s Measures:

Digital and Simplified Compliance: Introduction of a simplified code of conduct for AIF regulatory compliance.
Focus on Accredited Investors: Proposal to adopt global standards by introducing the Accredited Investor (AI) model for AIFs.
Valuation Oversight: Proposal for a framework similar to credit-rating norms to address valuation conflicts of interest.
Fund Manager Registration: Suggested dual-layer regulation with responsibilities assigned to both fund managers and funds to improve efficiency.

Way Forward:

Strengthen Regulatory Framework:
- Enforce robust checks on fund structures to prevent regulatory circumvention.
- Introduce clearer guidelines for valuation and conflict resolution.
Adopt the Accredited Investor Model:
- Implement global best practices to ensure investments align with investor qualifications.
- Reduce accreditation costs by expanding the investor base and encouraging intermediaries to handle the process.
Leverage Technology and Transparency:
- Leverage AI and other digital tools for efficient regulatory compliance.
- Mandate transparent disclosures on fund objectives, risks, and valuation practices.
Striking a Balance: Maintain a balance between regulatory stringency and promoting industry growth, as reflected in SEBI’s commitment to investor protection. Avoid overregulation that could stifle innovation and growth in the AIF industry.

What is the yen carry trade? - Explained

Context: Unwinding of the Yen carry trade was one of the reasons behind the fall in global markets recently.

What is carry trade?

Carry trade involves borrowing at low interest rate in one country (in one currency) and investing in another country (in another currency) where interest rates are higher to achieve higher returns.
This is possible when central banks of different countries try to keep their interest rates at a level that suits their specific economic conditions. The difference in the interest rates in the respective countries enables the carry trade.
The carry trade also take advantage of the weakening currency of the low interest rate country to offset any conversion expenses.

What is Yen carry trade?

The yen carry trade involves borrowing in low-interest Japanese yen and investing in higher-yielding assets in other countries to profit from the interest rate differential and potential currency movements.

e.g., Japan central bank (the Bank of Japan) had kept interest rates at 0% between 2011 and 2016 and, in fact, pushed them even below zero (-0.10%) since 2016 to stimulate economic activity.

Such low interest rates incentivise investors to borrow cheaply in yen and invest in other countries (such as Brazil, Mexico, India and even the US) in a bid to earn better returns.

How did it impact global markets?

While Bank of Japan kept its interests lower, other central banks kept raising their interest rates in the wake of Russian-Ukraine war which incentivised yen carry trade.
However, Bank of Japan increased its interest rates by around 60 basis points in the last 6 months. it led to investors who had borrowed in yen and invested in Brazilian real or Mexican peso or Indian rupee, selling their assets in international markets (Unwinding of yen carry trade).
This unwinding of yen carry trade also strengthened Yen’s exchange rate against currencies like dollar, real, rupee, peso etc.

GIFT (Gujarat International Financial Tech) City

Context: The role of the International Finance Securities Center (IFSC) at Gujarat International Finance and Tech (GIFT) city is vital in overcoming trade finance challenges.

About GIFT City

GIFT City has two zones, one is “Domestic” and the other is “SEZ”.

In the domestic zone, Domestic transactions denominated in Rupee can be undertaken.
The SEZ zone (GIFT-SEZ) has been declared as “International Financial Services Centre (IFSC)”. GIFT-SEZ is the only place in India designated as IFSC. All transactions are in foreign currency.

GIFT SEZ is India’s first International Financial Services Centre (IFSC) set up under Special Economic Zones Act, 2005.

An IFSC is a jurisdiction that provides financial services to non-residents and residents, to the extent permissible under the current regulations, in any currency except Indian Rupee.
Units (entities) related to Banking, Insurance and Capital Markets are considered as IFSC units and hence Banks, Insurers and Capital Market related companies can set up their units in the IFSC (GIFT-SEZ).

Significance

The IFSC in GIFT-City seeks to bring to the Indian shores, those financial services transactions that are currently carried outside India by overseas financial institutions to a centre which has been designated for all practical purposes as a location having the same ecosystem as their present offshore location (like London, Singapore etc.), which is physically on Indian soil.
IFSC (GIFT-SEZ) is the only place in India which allows offshore transactions (i.e., it is treated as outside India transactions)
IFSC is deemed to be a foreign territory and entities approved as IFSC units are treated as non-resident in India.

Limits of Transactions

Therefore, RBI ODI (Overseas Direct Investment, which means investments outside India) Rules are applicable on investments in IFSC.
Accordingly, Indian parties are allowed under Automatic route to make investment in IFSC entities and that shall be treated as ODI.
Individual persons resident in India are allowed to invest up to USD 2,50,000 per financial year under the Liberalised Remittance Scheme (LRS) outside India or in IFSC.

Alternate Investment Fund

Context: RBI has recently introduced changes for the investment by its regulated entities in Alternate Investment Funds.

About Alternate Investment Fund:

Alternate Investment Funds are funds that pool capital from investors to invest in asset classes such as real estate, venture capital and private and public equity.
An AIF under the SEBI (Alternative Investment Funds) Regulations, 2012 can be established or incorporated in the form of a trust or a company or a limited liability partnership or a body corporate. Most of the AIFs registered with SEBI are in trust form.

Under SEBI guidelines, AIFs operate in three categories:

Category I: AIFs invest in start-up or early-stage ventures or other areas which the government considers as economically desirable. Example: Startups, MSMEs, Infrastructure funds.
Category II: AIF includes real estate funds, private equity funds, and funds for distressed assets. Such funds are prohibited from raising debt except for meeting day-to-day requirements.
Category III: AIFs are those investing with a view to make short-term returns and include hedge funds.

Minimum number of investors

No scheme of an AIF (other than angel fund) shall have more than 1000 investors. In case of an angel fund, no scheme shall have more than forty-nine angel investors.

Raising of fund

An AIF cannot make an invitation to the public at large to subscribe its units and can raise funds from the investors only through private placement.
An AIF may raise funds from an investor whether Indian, foreign or non-resident Indians. However, AIF (other than angel fund) shall not accept from an investor, an investment of value less than one crore rupees.
In case of investors who are employees or directors of the AIF or employees or directors of the Manager, the minimum value of investment shall be twenty-five lakh rupees.

Tenure of AIF:

The certificate of registration of an AIF shall be valid till the AIF is wound up.

Procedure of winding up of AIF:

when the tenure of the Alternative Investment Fund or all schemes launched by the Alternative Investment Fund is over; or
if seventy five percent of the investors by value of their investment in the Alternative Investment Fund pass a resolution at a meeting of unitholders that the Alternative Investment Fund be wound up; or
In case of a trust, if it is the opinion of the trustees or the trustee company, as the case may be, that the Alternative Investment Fund be wound up in the interests of investors in the units; or
if the Board so directs in the interests of investors.

Note: Category I and II AIFs are required to be close ended have a minimum tenure of three years. Category III AIFs may be open ended or close ended.

Open ended funds can be bought or sold anytime, the closed ended funds can be bought only during their launch and can be redeemed when the fund investment tenure is over.

Change in AIF category:

Only AIFs who have not made any investments under the category in which they were registered earlier shall be allowed to make an application for change in category.

Report Submission:

Category I and II AIFs and the Category III AIFs which do not undertake leverage are required to submit reports to SEBI on a quarterly basis while Category III AIFs which undertake leverage are required to submit the reports on a monthly basis.

Overseas investment:

Overseas investments by AIFs investments shall not exceed 25% of the investible funds of the scheme of the AIF subject to an overall limit of USD 500 million. The AIF shall have a time limit of 6 months from the date of approval from SEBI for making allocated investments in offshore venture capital undertakings.

Latest change by RBI regarding investment by banks and other entities regulated by RBI in Alternate Investment Fund:

Lenders cannot make investments in any scheme of AIFs that has downstream investments, such as hybrid instruments in a debtor company of the former.
However, lenders are allowed to make investments in any scheme of AIFs that has downstream equity investments in a debtor company of the former.
Provisioning will be required only to the extent of the investment by the lender in the AIF scheme, which is further invested by the fund in the debtor company. Earlier provisioning had to be made on the entire investment of the lender in the AIF scheme.

For ex: earlier, if a lender invested ₹10 crore in a ₹100-crore AIF scheme, which in turn invested ₹1 crore in the debtor company of the lender, the provisioning would be on the entire ₹10 crore. But now the provisioning will be only on the ₹1 crore exposure.

Note: The RBI said investments by lenders in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of its latest circular.

What is T+0 Settlement?

Context: In line with the directions by the Securities and Exchange Board of India (SEBI), stock exchanges will introduce the same-day or T+0 trade settlement for a limited set of securities.

What is Trade Settlement?

Trade settlement is the process of transferring securities and funds between buyers and sellers after a trade is executed.
The shorter the settlement cycle, the faster investors can access the securities and funds.

How are Trades Currently Being Settled?

Currently, the Indian stock market operates on a T+1 settlement cycle for all scrips.
For example, if an investor buys shares on Monday, he/she will receive them in their demat accounts on Tuesday. Similarly, if the shares are sold on Monday, they will receive the money in their bank accounts on Tuesday.
Under T+0, trades will be settled on the same day.

Benefits of Shorter Settlement Period

Increased Trading Opportunities: T+0 settlement provides investors with improved flexibility to capitalise on short-term trading opportunities and market fluctuations. Investors can react quickly to market developments, execute trades promptly, and optimise their investment strategies in real-time.
Reduced Settlement Risk: T+0 settlement eliminates the need to wait for an additional day for trading confirmation and settlement. Thus, reducing settlement risk and enhancing investor confidence for smoother trading experiences.
Enhanced Liquidity Management: T+0 settlement facilitates efficient liquidity management by enabling investors to access funds and securities immediately after trade execution. This allows them to reinvest proceeds or deploy capital into new opportunities without waiting for settlement cycles, maximising portfolio liquidity and agility.
Adaptation of Trading Strategies: T+0 settlement may prompt investors to employ more active trading strategies like day trading or scalping to exploit short-term price movements and generate quick profits. Algorithmic and high-frequency trading strategies may also become more prevalent, leveraging real-time settlement capabilities for rapid trade execution.

Framework for Lending and Borrowing of G-Secs

Context: RBI has issued guidelines for lending and borrowing in Government securities. This move is expected to add depth and liquidity to Government Securities market aiding in better price discovery for Government securities.

Salient Features of Framework for Lending & Borrowing of G-Secs

Government Securities Lending Transaction (GSL-Transaction):
- Refers to dealing in Government securities involving lending of eligible Government securities for a fee, by the owner of those securities (lender) to a borrower, on the collateral of other Government securities.
- The GSL Transaction should be for a specified period of time with an agreement that the borrower shall return to the lender the security and lender shall return the securities received as collateral to the borrower at the end of the agreed period.
- Government Security Lending Fee is the feed paid by the borrower to the lender of Government Security as mutually agreed between them for undertaking the transaction. (RBI will not mandate the fee).
Eligible securities for lending/borrowing:
- All Government Securities issued by the Central Government (excluding Treasury Bills) would be eligible for lending/borrowing under a Government Security Lending (GSL) transaction.
- Securities obtained under a repo transaction, including through RBI's Liquidity Adjustment Facility or borrowed under another GSL transaction will also be eligible for lending under GSL transaction.

Collateral for lending/borrowing:
- G-Secs issued by Central Government (including Treasury Bills) and State Government Bonds would be eligible for placing as collateral under a GSL transaction.
- Also securities obtained under a repo transaction, including through RBI's Liquidity Adjustment Facility, or borrowed under another GSL transaction are also eligible to be placed under a GSL transaction.
Eligible participants:
- Eligible entities for lending of securities for GSL Transaction:
- Eligible entities for borrowing of securities for GSL Transaction: Scheduled Commercial Banks, Primary Dealers, Urban Cooperative Banks.
Pricing of securities/collateral: In a GSL transaction, the securities should be lent (placed as collateral) in the first leg at market related prices and received in the second leg at the same prices. The second leg would involve a consideration amount viz. the GSL fee to be paid by the borrower to the lender of the security.
Computation of Statutory Liquidity Ratio (SLR)
- SLR eligible securities borrowed under a GSL Transaction to counted as SLR by the borrower. Such securities lent under a GSL transaction to be not accounted for SLR by the lender. (Similarly for the collateral).
Maturity of GSL Transactions: Minimum tenor of a GSL transaction shall be one day and maximum tenor shall be maximum tenor shall be maximum period prescribed to cover short sells.
Lending/borrowing process:
- GSL Transactions may be contracted using any mutually agreed process/platform, including but not limited to, bilateral or multilateral, quote driven or order driven process, anonymous or otherwise.
- Settlement of all GSL Transactions will be on a Delivery versus Delivery basis and shall settle through Clearing Corporation of India limited or any other central counterparty or clearing arrangement approved by RBI.

Commodity Derivatives Market

Context: The Indian government has permitted derivatives trading in 11 more commodities including skimmed milk powder, cement, apple, bamboo and timber based on a recommendation from the Securities and Exchange Board of India (SEBI).

A Derivative is a financial instrument whose value is based upon the value of an underlying asset like equities, currency or commodities or other financial assets. A derivative contract, which has a commodity as its underlying, is known as a ‘commodity derivative’ contract. Most common types of derivative instruments are forwards, futures, options, and swaps.

Agricultural commodity derivatives, have the underlying asset as an agricultural commodity, such as cereals (wheat, rice), pulses (chana, tur), spices (jeera, pepper) and oilseeds (soybean, castor).

Non - Agricultural commodity derivatives, have the underlying asset as a non- agricultural commodity, such crude oil, gold, silver, Aluminium, Iron, etc. The non- agricultural commodities are generally natural resources that are mined, extracted or processed.

Futures and Options are two important derivative instruments that are traded in the commodity derivative market. In future contract, the buyer has the obligation to buy/sell the assets. Whereas, in option contract, customers have no obligation to buy/sell the assets.

Benefits of commodity derivative markets

Hedging: It is a price risk management tool adopted by actual users such as processors, miners, exporters, importers, manufacturers, etc. Hedging means taking a position in the derivatives market with an objective of reducing or limiting risks associated with price changes.
Price discovery: Speculation is the practise of trading in order to profit quickly from price changes. Speculators never use the item for physical purposes because their goal is to benefit quickly from price fluctuations. This contributes to transparent price discovery in the underlying commodity markets.

Commodities that are suitable for derivative trading:

The commodity should have relatively large demand and supply.
Prices should be adequately volatile.
The commodity should be free from substantial control from Govt.
Regulations in terms of supply, distribution and prices.
The commodity should preferably have a long shelf-life.

Financial Stability and Development Council (FSDC)

Context: Union Minister for Finance chaired the 28th Meeting of the Financial Stability and Development Council (FSDC). FSDC deliberated on issues like curbing unauthorised lending apps' operations, strengthening inter-regulatory coordination, simplifying, and digitalising KYC process and adopt uniform KYC norms.

What is Financial Stability and Development Council?

Set up by the Union Government in 2010 as a non-statutory body, based on earlier recommendation of Raghuram Rajan committee.
Chairperson- Union Finance Minister
Members- heads of financial sector regulators (RBI, SEBI, PFRDA, IRDA, IBBI, IFSCA), secretary of Department of Economic Affairs, Secretary of Department of Financial Services, chief economic adviser.
It also has a sub-committee called sub-committee of FSDC which is chaired by the Governor of RBI.
FSDC comes under the Department of Economic Affairs, Ministry of Finance.

Objectives of FSDC:

Strengthening and institutionalizing the mechanism for maintaining financial stability.
Enhancing inter-regulatory coordination.
Promoting financial sector development.
Also focuses on financial literacy and financial inclusion.