Economic Survey 2025-26 | Chapter 3: Monetary Management and Financial Intermediation | UPSC

[music] So I'm here again with chapter 3 economic survey and I'm recording it on 26th of February uh Thursday in the afternoon and hopefully it should reach you by tomorrow evening. So we will begin with this topic on uh you know monetary management and financial intermediation. mainly with for you it will be important from prim's point of view but for people with economics optional or economic services exam the factuals given in it will be very important even otherwise for GS people the discussion on uh regional rural banks the discussion on steps taken by SEBI to improve things in India will also be very important from main's point of view also all right so coming back in introduction the the economic service says that RBI Monetary management involves regulating money supply, interest rates and liquidity. And what is the purpose? To ensure price stability that sustain growth with stable price through money supply, interest rate and liquidity. And it is important that whatever changes RBI does, banks pass on those changes to people for efficient allocation of resources. And of course with globalization the financial costs had come down but with deglobalization again the financial costs are rising. So that is what survey begins uh with. Then they begin with global financial markets and they say that the tariff announcements by US has resulted in huge uncertaintity. So we see many people shifting away from US dollar to gold and there has been a dip in global equities and a spike in risk premia. Risk premium means more money taken to cover for the risk that may arise in future. All this was after the liberation day tariff announced by Donald Trump. But then of course now then survey gives a very good reason keep it in mind that prolonged uncertaintity impacts finance through three channels. Delayed investment uncertain investment delay. So capital formation will be delayed. your your production capacity will not grow very easily. Higher credit spreads which means what depositors will get less interest and borrowers will have to pay larger interest. Banks will keep a larger spread between the two because the banks will be worried about losing money. And number three, asset prices will correct very quickly due to risk contagion. you know the equity prices will fall, the bond prices will fall because of the risk affecting all countries in a globalized world and they said then IMF is noting that there are new vulnerabilities like AI models. So what do they AI models do? They create more herd behavior. Why? Because most of the AI models are trained in the same manner and that means that whatever prediction they will do will be in the same composition and everybody will take the same reaction. human element and that will result in a lot of volatility in the market also another reason new volatility is that larger than proportionate increase in AI related stocks you know 75% of share price rise in US is because of AI related stocks and then another risk is elevated global debt the global debt to GDP ratio is now almost touching 100% which is a worrying sign and another is rapid growth of cryptocurrencies like stable co and stable coins which heightens the risk you know that challenge in one currency can risk can can then flip over into another the important the survey is suggesting there are new vulnerabilities one AI model based prediction two heavy investment in AI based sector three global debt being rising and fourth new generation coins, stable coins, crypto and all which is resulting in possibility of markets interfering with each other. Then so survey says that if you take a they take a study of 811 registered firm firms from 2010 to 24 and they say that the firms which are midsized firms are more vulnerable to uncertainty while large and small firms are less vulnerable. Why large firms have enough money and small firms don't have to bother because they're less dependent on capital. Another is another is that between 10 and 24 most stocks were shocks were global in nature you know like the Russia Ukraine war or the European crisis or the subprime crisis and so on. So the firms which were in export sector reduced their capital formation more than firms which were domestically dependent. And third that the traditional and medium technology sectors as well as the service sector displayed continued capital formation. Why? They were less dependent on foreign market. They were less dependent on new type of technology. So they could do things much better compared to the high-tech manufacturing firms and all which had more uncertaintity to face. All right. So the moral of the story is reduce uncertaintity to make sure that private capital expenditure can be revived and expanded. Then they talk about India's monetary policy balances, price stability, financial stability and inclusive growth. All right. So India's monetary policy will be focusing on keeping inflation stable, financial system stable and growth inclusive. And they said that with easing inflation now the RBI has reduced repoor rate by to 5.25% 25% up to 100 basis points and they have shifted to neutral stance which means that looking at the world in future they will decide whether to increase money supply or reduce money supply further and then of course CR has been reduced in as steps by RBI to increase liquidity you know steps by RBI to increase liquidity. So one reporate cut two CR cut three 2.5 lakh K open market operation in the bank you know so that is that is another factor so these are steps taken by RBI to increase liquidity then the survey says that liquidity condition is very evened up we have good enough money and there is a fourth thing here 5 billion forex swaps in November forex swap that RBI dollar. So that is forex swap. So rupee increased supply of rupee taking dollar today giving rupee today and in future they will take rupee give dollar. So today rupee supply has become higher. So we see that the net liquidity adjustment facility remains in surplus in the fiscal year 26 up to January 26. There was a slight period in December when it was in deficit but that was because tax payments were happening a lot in December and stock market clearances were happening but then generally it has come back into surplus and this makes sure that the overall interest rate in India remains low so that investments can be encouraged a financial intermediation banks financial intermediaries RBI changes Hong Kong banks, non-banking financial companies, micro financing institutions, capital markets and financial technology platforms. All right. So just keep it in mind from PLM's point of view that which all institutions can be used for transmitting the monetary policy changes done by RBI to the market. So these are the monetary policy institutions. Then they talk about performance of banking sector which is very important both prelims and men's point of view that the the scheduled commercial banks remain strong. The average capital to risk weighted at asset ratio is at 17.2% and the gross NPA and net NPA is now at a multi-year low. If you see 2.2% of total loan extended and 0.5% of total loan extended in in 18 they had reached 11.2 two and 6% here things looked very tragic thankfully India has resolved it and we are now in a place where twin balance sheet deficit has been resolved uh corporates are less leveraged now so we see the pickup in private investment also and we see the pickup in bank lending also that's good news for Indian system then of course the recovery rates in NPA have doubled in fiscal year 18 the recovery rate was 13.2% 2% now 26.2% and the slippage ratio slippage ratio NPA so that slippage ratio has come within 1.3 1.4% which is again something which is under control. So overall we see that bank credit is going okay and we see that uh overall the economy looks healthy with respect to the banking system point of view. Another thing from prelims point of view remember personal loan grew fastest because of the gold loans that came in and increasing prices of gold made the collateral easy. MSME credit became f remained fast enough with 21.8% growth rate recorded and the micro and small enterprises in fact recorded 24.6%. Why would this happen to again reasons for MSME loan growth you know MSME credit a regulatory easing you know regulatory easing on voluntary pledge of gold and silver as collateral so easy regulation you could give gold and silver as collateral take easy loans made MSME get easier loans government gave more credit guarantee under the credit guarantee uh you know transfers and for small and medium enterp micro and small enterprises so more credit guarantees were given MSME classification was revised in last year's budget so now there are larger firms qualifying as medium enterprises and they take more loans from the market and there have been credit cards introduced for MSME so overall we see that credit growth for commercial sector has been very healthy which is good news for the economy because it suggests that in future we are seeing some high investment Also another good news is that gradually people are shifting from banks to non-bank. Like if you see the non-bank credit was 5.9 uh lakh cr and bank credit were non-bank sources were 7 uh 7 uh lakh cr sources. This has now gone up to 20.3 lakh cr and 10.6 6 lakh cr suggesting that non-bank sources what are non-bank sources like bonds being issued foreign direct investments coming into India shares being issued are also being used by companies especially you know large companies are now raising most of their money by issuing bonds or from the share market so that means the small companies can raise money from the banks and the large companies can raise money from the market so the cost of borrowing remains low because the banks face less pressure or of you know too much demand of credit as I told you large firms are relying on market based funding and small firms for bank credit all right so the bank balance sheet is strong non-bank intermediation is strong funding sources have diversified so that ways India's investment prospects in the money market or monetary market looks good according to survey and I would agree to that regional rural banks they've put a section on it this is important for everyone as I told you for optional people for GS people and for economic services people that you know first of all they are primary financial intermediaries in rural and semi-rural areas and to strengthen them the bank government has consolidated them and now we have 28 RRBs alongside IT integration core banking solutions so the performance has now improved consolidated net profit is at the highest ever seen 7.6,000 K and 6.8,000 8,000 K. GMPPA ratio has improved to 5.4% lowest in 13 years. Credit deposit ratio has risen to 73.8%. Credit deposit ratio is deposit giving more loan to earn money out of that. And then the capital adequacy ratio is 14.4% 4% and priority sector lending has consistently gone beyond 75% of the targeted amount. These are all achievements of regional rural banks. Please keep it in mind if you are writing an answer or revival of RRBs. You can use this easily. Then of course this is the performance chart about which we discussed. You can use that. Then some major policy actions in banking sector by RBI. Transparent regulation framework of formulation of regulation impact analysis consultation transparently then regulatory consolidation 9,000 circulars orders 2838 master directions convert to obsolete instructions unnecessary compliance burden. This is removed. So more freedom to banks, more freedom to financial institutions to do business in India. Then review mechanism lie that every five seven years we will do regulatory review so that outdated regulations can be removed and digital MSME credit has been launched by the public sector banks you know so that credit assessment model can be done for MSMES integrating the credit guarantee trust for micro and small enterprises guarantees small so that the manual decision-m can be reduced more efficiency, less corruption chances and that is again something that RBI has introduced. All right. And responsible AI use that is making sure that there is free AI framework to promote innovation but prudent risk management. So please keep this in mind. These are the policy actions in banking sector by RBI. Transparent regulation, regulatory consolidation, regulatory review mechanism, digital MSME credit and responsible AIUS. Then AI important by chance means that what are the steps taken by government or RBI to promote Indian banking. This is something that you can write. Then AI in financial services may global trend year that the European central banks have been using it for inflation forecasting and risk detection. US Federal Reserve for research coding and all. Bank of Canada for macro forecasting. Bank of England for machine learning. In India, we have not used it much, but the global economy says that we can have safe AI deployment provided we can make sure it is transparently done. So RBI has now introduced a free AI framework under which Indian in Indian finance it is still nesscent only 21% of the institutions surveyed by RBI are using AI mostly large banks and it is not yet introduced for assessment of loans and all it is is mainly for customer interaction bot chatting and so on also to make sure there is safe safely safe safeguards also the RBI has introduced a framework to make sure that personal data is protected and you know people are given more importance innovation is done uh better there is more equity of understanding and so on so innovation promotion and risk mitigation this will be the major factor for India's AI framework is go important with respect to what has been government's step to promote AI in Indian banking all right government step so this slide becomes your answer to that and major factor is we are going for efficiency. We are going for risk mitigation, better quality lending, without compromising data protection without compromising privacy and without compromising equity. All right, this is the basic framework on this slide but please keep it in mind. Then of course they talk the survey talks about micro financing micro financing loan small institutions targeting small population so that small loans etc can be given. That is the idea behind micro financing. So again RBI says that India's micro finance sector plays a crucial role in grassroots development serving predominantly women and rural borrowers. That means it is going for inclusive growth financial inclusion. If you're writing some answer on financial inclusion, micro finance talk can be a very good and and if you can give these data points notes financial inclusion data point you know in financial inclusion data point that as of March 2025 non-banking financial companies based micro finance mutations are holding 39% loan outstanding followed by banks and small finance banks and they are operating over 685 districts. Also the active borrowers have risen from 330 lakh to 627 lakh which itself was show and then the gross loan from 2 lakh 2.3 lakh cr 33 lakh cr. It's not 33k 33 lakh k. So you know this is something you can you can bring as data points to show that how uh you know micro financing is growing in India. However in 25 we have seen some decline because postcoid pandemic there was a huge surge. Now some correction is happening. Also RBI has made sure there are regulatory inter interventions to control risky asset dispersement. All right. Still the income assessment of households is still weak. We can use AI over here. Borrowers total indebtedness is not seen. So one borrower can borrow from 10 different institution and maybe default one day and we can be in trouble. So that is also not very visible for our micro financing institutions. And also you know u we don't have proper competition in the sector the way we should have it. So overall these are some challenges of micro financing but but if we can improve on these it can be a very good way in improving self-help groups for farmers crop diversification microenterprise funding all that in India can be done by this method or government aspects survey highlight that you know government is putting some commercial capital to create more scale technology adoption in the microfund finance sector so that low-inccome and rural borrowers can be integrated especially women in that to the formal credit system you know however there are problems like over lending borrower overinditedness and rising NPA so you can't grow infinitely also you should not grow unnecessarily loan okay let's have quantity based targets and let's keep giving more loan more loan more loan then chances that defaults will happen on those loans become even further higher up. So we should be very careful that while giving loans we should not be too much overenthusiastic. We should do risk assessment proper borrowers total intendedness coverage use good software to internalize data points and then you know improve micro financing. So micro financing will be a good answer only when we can control defaults when we can make sure funds are used for better purposes. This is something that they are saying here. All right. impact washing term on paper but in reality that welfare is not actually happening. So you know excessive rewarding to particular sectors like women oriented enterprises or schedule cast enterprises but that excessive reward is not resulting in actual upgradation of the target group then you are doing impact washing. All right. So that survey says one should be careful about not doing to survey that shift key towards welfare limit indicators just say how to improve this situation shift towards net asset accumulation you know do that that net asset accumulation cash flow stability Can they use my that money to earn better profit in future? Similarly, savings growth you know that is my loan resulting in encouraging people to save more and is it resulting in reducing reliance on informal credit credit and it is it reducing debt to income ratio and distress borrowing. Yeah. Welfare oriented. So cash flow stability two savings growth three reduced reliance on informal credit four debt to income ratio being reduced five distress borrowing reduced six you know so these are long-term financial resilience we are doing things much better then of course they say that it is not systemically linked to valuation calculus of investors so maybe the investors may not be willing to s finance such things And that is where sometimes the micro finance institutions might have trouble in expansion. But that is where the role of government comes in and they they must take steps to make sure that that there is impact assessment on the basis of actual welfare and not simply on the basis of more loans given in the market. And this is sustaining inclusion requires shifting from scale-based metrics to welfare oriented outcomes. shift from scale-based metrics to welfare oriented outcomes long-term resilience economy to interview about the role in through which MFI can be improved. Then they say financial inclusion and in financial inclusion they say it has achieved with adult bank account ownership rising from 35% to 89% in 2021 with narrowed gender and income gaps. Of course PM Jandhan Yoja has played a very big account amount 55.02 cr accounts are now opened with 36.63 cr in rural semi-ural areas. Standup India scheme where 10 lakh to 1 cr rupee loan to is given to SCST and women entrepreneurs for new enterprises. Greenfield means new. PM Swanidhi scheme where collateral free loans are given to street vendors and PM Mudra Yojana create support for micro and small enterprises across sectors. So these are the key initiatives being taken up and when we say progress in financial inclusion so RBI's financial inclusion index is tracking 97 indicators across banking insurance investment and pension sector economic survey inclusion indexclusion index that it is on the basis of adapt availability, accessibility you know and the weightage is attached. So the composite index has risen from 64 to 67 and we have some good empirical evidence on PM Mudra Yoja say for example 36.18 lakh cr rupees has now been dispersed over 55 cr accounts till October 25 and over 10 cr firsttime borrowers are there then share of smallest loans declined from 92% to 63% shishu loans Shishu and 69% loans are going to women and substantially to SCST OBC and the NPA ratio is only 3.31% which is a very good news. So this is the this is again the empirical evidence notes upgrade in data points just add them over there and the notes will be upgraded in PM Swanidhi again they are giving us the impact survey and they say borrowers are progressing very quickly income are rising 20% between 23 to 25 lot of repeat borrowers which means money is coming back very nicely asset investment is yielding higher income gains of 33% welfare spillovers at household Well, so housing upgrades have happened, food access has improved, healthcare education has improved. So in real sense, achieving inclusion, digital payment usage has increased now to 83% among PM Sonidi borrowers and 66% borrowers expressed that they will take further loans which shows again that growth has been tremendous. NPA rate is below 10%, which is again quite a welcome thing which means that even street vendor loans are giving us some good result. So they say that if there is credit access that is what the result credit access and repayment discipline then there is enterprise growth rising credit demand and further growth in the economy. Of course this digital public infrastructure and regulatory in innovation is another factor which is allowing financial inclusion and then there is an account aggregator framework which is based on the uni unified payment interface transaction trails. So in that case again financial deepening is happening because active usage leads to real inclusion. Interoperable digital payments Google customers already record as a bank I already have the record of what money they earned and I don't need further credit you know research and that allows me to give easier credit without raising the default rates so we see that overall services that governments PM Swanadhi PM Udra Yojana and so on those kind of schemes have given a lot of possibilities then digital public infrastructure has resulted in it account aggregator frame framework has resulted in it. Because of UPI, there has been financial deepening. They also say that u you know that UPI adoption is linked to higher economic output and diversified everyday usage. There's businessto business payment, eway bills payment, normal you know support payment and so on. Also, UPI complements rather than replaces cash because you know the cash composition has not disappeared. We still have around 65% usage of cash by UPI holders. Also also public interoperable infrastructure can drive large scale financial deepening because this is publicly owned and this is interoperable. So that means more and more people have been hitching the bandwagon. We are having billions of transactions through UPI and even poorer section of society now uses it. So and that leads to less less wastage. It also leads to less loss due to theft etc because digital money cannot be stolen. So easily then of course we have to be conscious about cyber frauds which survey doesn't mention but I'm telling you that cyber frauds we have to be conscious about and people having the right count of their money so that confusions don't happen we have to remain conscious about then they give us a page on performance of insolveny and bankruptcy code and they say that in this again you can upgrade your notes using this uh this suggestion there and they say that due to IBA since our NPA have gone down the standard and poor has given us a credit rating upgrade and recovery rates have improved from 15 odd% in the preIBC era in fact it was not even 15 20% it was 12% in the preIBC era to around 30% in the post IBC era while the average resolution timelines have reduced from 8 years to T2 years 57% of closed CRP cases that is corporate insolveny resolution professional close cases 57 57% close negotiation 43% liquidation because the borrower did not agree to pay back on the terms and condition so the this resolution to liquidation ratio is improving very nicely and remember I told you in the class also that liquidation is the last resort if you resolve that is better because jobs etc remain preserved that way in 1300 resolved cases, creditors have realized 94% of fair value and 170% of liquidation value. So wherever cases have been resolved, much better money has been recovered. Also we see that overdue corporate loan ratios fell from 18% to 9%, cost of debt declined. Why? Because now even if a firm is distressed, the lenders know that through IBA they can recover their money. So the cost of debt to even distressed firms goes down because of better a possibility of recovery. Corporate governance has improved with more independent directors in the in the firms with IBA and banks net NPA has gone down drastically. So that again is a factor which helps us in assuring that IBA has served these benefits already as upgradation but challenges discuss that timelines exceed with respect to closure judicial backlogs are huge NCT benches are less and limited uptake of prepackaged insolveny resolution process notes survey that only 14 admissions have happened in four years. So the prepackaged insolveny resolution process for MSME has not worked as good you know overall u overall it is working well but a lot of capacity expansion and foster education will be needed on capital markets it won't be very important for you but you should just keep some basic things in mind like the in from January till December uh the share market gained around 10% also globallies compared to global performance. India's performance has been subdued. In primary markets, there have been IPO issued almost 10.7 lakh cr and 53 lakh cr have been mobilized in the last four years. IPO volumes have been continuously rising in India. All from prelims point of view listings have increased in India. So that means primary markets are showing some high performance. Your important exam point of view say the small medium enterprises market expansion. The listings have increased to 217 small medium enterprise the share market listed here 9,635 cr has been raised in fiscal year 26 alone only till December 25 and 1380 companies listed on MSEM platforms of NSE and BSE to you to add on performance of theme in India notes MSME on performance of theme in India with respect to their financial ization that more and more theme are now joining the financial sector. Then you know SEB has introduced the security market code to consolidate all securities law for mechanism for delivery of regulatory services. So rulemaking will be streamlined, adjudication will be streamlined and executive action will be quicker. Also regulatory governance structure the board composition will now have 9 to 15 members, three permanent members. Independence will be given to the to the SEI board and accountability will be established with public electronic database of regulations and orders to your reform within SEBI that this is the reform within SEI to inform things improve things in India. Also there will be statutory recognition of market infrastructure institutions that is stock exchanges clearing corporations in statuto recognition say function delegate like intermediary registration and there can be more decentralization of the process and procedural safeguards will be kept so that forgery can be controlled important economic services important as to changes brought about in capital market regulation to improve its performance. Changes brought about in capital market regulation to improve its performance. Your interview appear somebody in the interview who has a financial market background. This can be important. Then we see that the retail participation is rising tremendously in the capital market. 63% households are now aware of at least one security product. We see 235 new DMAT account have now been added and total accounts are 21.6 6 cr and unique investors are 12 cr that means 12 cr are separate people they can have multiple demat account and 25% are women mutual fund has reached now 5.9 cr people that shows increasing population inclusion in financial sector within India and then financial savings in India has evolved with more and more money going towards equity comparatively lesser in fixed deposit but equity and mutual funds are getting more money. This is what the data points show. And total households wealth accretion in equities is now 53 lakh cr but more funds in equity and less in fixed deposits. No, this point tells you that that deposits in fiscal year 12 were 57%.9% share while shares and mutual funds were only 1.8%. Now deposits are 35% and shares in mutual funds are 15%. Yeah. important here from prelim's point of view of changing composition of assets in India currency has increased in number seven has decreased from 8.6 to 7.2 you know insurance and pension funds have been relatively stable 28.6 and 29.6 deposits importance has become lesser 46.3 to 39.6 Six equity and investment funds have gone up by almost similar amount as deposits has gone down 15.7 to 23 but debt securities is a missing link debt securities bonds India household bond saving bond saving bond better return but bond saving has been relatively lesser in India. So this slide will give you that information. Then of course we see that more and more domestic people are now participating in Indian market and foreign investors are kind of counterbalanced by domestic investors. That's good news for India. Our overd dependence on foreign investors for stabilizing our financial markets is now becoming relatively lesser and domestic investors are also playing a bigger role. Also you know there is one missing piece debt market. In India it is only 16 17% of GDP. US may 40%, China 36%. So Indian households have taken up equities quite a bit. But I think Indian households need to shift to debt. Bond 8 9 10% return fixed deposit hardly gives a return of 5 6%. So if Indian households have to create financial security, grow rich at a faster pace, bond market development is very important. Services says bond market development can happen with more credit rating agencies. It can happen with easier regulations for bonds and it can happen by popularizing bonds in household you know uh portfolio by informing households about them. It can also happen if financial institutions reduce their holding of only government bond and hold some private bonds also so that there can be more and more possibility of bond market secondary market in the bond market secondary market but in India that is very restricted out of total bond that have been issued in India 99% have been through private placement route not through public offer 99% cases bond it is preddecided selling it. It doesn't show a very robust bond market. So that is again something very important that India should focus on its bond and municipal bond and debt bond market. They say remove prior approval requirement for brokers operating in gift IFSC. Enhance disclosure standards for related party transaction and streamline init converters to converter norms in infrastructure investment trust bonds and you can collect better money from that. Then there is market development and product deepening that is with respect to past risk and return verification agency government has introduced it is still under under implementation to help investors independently verify claim of advisor financial advisers electricity derivatives launch to ensure Sure hedging focus then more focus should be on protection against fluctuation. So that will that is electricity derivatives which will help also in equity derivatives to equity based derivative market fix that Tuesday and th or Thursday will be the clearing date prepared that randomly clearance there will be two days on which clearance will happen also revised open interest and position limit calculations so that it is they have upgraded it actually increased it so that people can take longer positions people can take larger positions participate better but informed participation not speculative participation is budget F and O pays by tax then introduced intraday monitoring of index derivative position intraday monitoring then monitoring fluctuations control so that ways even if a common person participates then the risk becomes lesser governance becomes better markets will then reach larger number of people and that can be another step in popularizing capital market among people of India and then it is corporate debt market. So corporate debt when we talk about it the corporate debt market is very important because if we want a developed India as I was telling you earlier also that if we want a developed India we will have to make sure that corporate debt is in picture. All right and corporate debt does better. All right. So when we talk about corporate debt market, a deep corporate bond market is essential for India's journey towards Vixs Bharat as I was telling you and this we are recording today that is Friday u 27th February and we will give you the video today. So hopefully it should start helping you and we will give you the video for budget in the coming week as well as the survey will continue. I'm trying my best to complete things by 15th February. But you know I'm also taking classes every day at least two plus I have other obligations. So I because I saw that some of you sent me a message that sir we would like you to finish survey sooner. So I would also love to do that but I'm occupied by many other things but I will try finishing survey and budget by 15th of March maybe a little more and then I will also give you some extra inputs. Next is app discussion students on certain current events that have been happening. Okay, coming back. So a deep corporate bond market is essential. Then why deep corporate bond market is essential? As I was telling you earlier that there there will be less burden on the banking system and corporates can get long-term loans from the market. Now we have had some high growth in a corporate bond market from 17.5 trillion rupees to 53.6 6 trillion rupees fact you know bond market there are 9.9 trillion has been issued in fiscal year 25 only and the market size stands at 15 to 16% of GDP but then as I told you yesterday 99% of issuances are through private placements which is not good news we should have a secondary market we should have more participants initial public offers and that will help in making the market solid. Then of course survey explains that what is the structural gap that persists of social corporate bond market to GDP ratio in countries like South Korea is 79%. Even in China is 38%. We are still at 12 odd%. Also so this is one low share in GDP in India. India structural challenge low share in GDP then also issuances are heavily skewed towards AAA double A rated bonds which means that small firms middle rated firms something like a double A minus or B+ don't get much of the market don't many people don't buy it so large firms still get money but the small firms don't all right so not equitably available that's another problem. The third is secondary market turnover remains low. As I was just telling you that in secondary market there is hardly any dealing. That means most people most bonds held till maturity then institutional investors dominate participation but prefer government securities or equities rather than corporate bonds. So the possibility of corporate bonds getting a market is less. So small size of the market. These are the challenges of structural problems of corporate bonds in India. What are the constraints? First of all, regulatory overlaps. Say, RBI, MCA, regulatory overlap delays, issuance, permission. Then restrictive investment mandates for institutional invest in investors. We need to remove this. We need to make sure that investment I can spend my money earned from bond anywhere. Third is high transaction costs because brokerage costs are high. permission charges are high and taxes are imposed at the same rate as what they are on equities. So automatically then people for high returns think about equities rather than bond. So that again becomes a challenge. Then weak secondary market liquidity and then recovery delays under insolveny processes because if it is a non-colateralized bond then you are not getting the money very soon. So these become the challenges of or constraints on the bond market. You know multiple uh multiple regulators in regul restrictive mandates on investment, high transaction cost, weak secondary market liquidity and recovery rates under insolveny processor affects investors confidence which reform efforts request for coach platform by CB. So in that case you know the retail access will become better and simplify the issuance norms. So issuance norms issue or small investors markets credit rating governance strong. So credit rating agencies like Chrysell RA and many others will be more trustworthy. Triparty repo system and credit default swap guidelines by RBI have been established. So now bonds can be used as a as a party default swaps safety of the investor will be higher and promotion of init and reads for long-term capital mobilization. So infrastructure investment trust, real estate investment trusts, people can issue bonds using their real asset. Like say suppose I'm a builder. I have a housing complex. I can use the bonds giving that housing complex as a collateral and issue a part of that complex as a collateral and issue bonds through real estate investment trust and those bonds can be purchased by people. I'll make profit share the profit with these people. So that ways the bond market can expand. What is the way forward to move towards a 120 trillion rupee market by 2030? First regulatory harmonization and single window process. multiple regulators. Now second expanding investor base like creating possibility that long-term pension funds, insurance companies are encouraged to buy corporate bonds and do not rely only on government bonds. Third, encouraging mid-rated bond issuance, you know, encouraging small companies, medium companies, companies with lesser, you know, ratings but still issuing bonds and getting their loans. Fourth, enhancing market making and unified trading platforms like you know a SB or an NSE kind of a platform for bonds where there is proper market making people know that bonds in bonds return supporter you know supplier of of information. So that will make the market more robust. You see this mutual fund campaign resulting in a lot of people investing in mutual fund. So something similar we need to do for the bond market and similarly strengthening insolveny resolution for faster recovery that if we can make insolveny and bankruptcy act better it will mean people will not be worried about buying bonds that go that god knows whether I will be able to recover money or not and it is important because small firms will be much better off if they get money from bond market rather than the the banking system. Then survey gives a very nice idea India capital cost India long-term interest rate developed countries% why is capital cost high in India why India's costs are higher than developed economies costs and survey comes with a very nice you know idea it says see whatever is the capital demanded is for majorly investment and how is this investment financed by domestic savings or foreign savings savings. But if your country has a long large current account deficit, then the dependence on external capital becomes large country current account deficit capital foreign capital coming into my country. But foreign capital coming in my country will demand a risk premium and their demand of risk premium increases the interest rate and makes cost of capital higher to survey that current account balance improve twice as effective than financial market deepening. So of course do financial market reforms but control your current account balance. How will you control your current account balance? By making yourself more productive and by promoting exports. Exports promote. If you are more productive, your cost of production will be low and exports will rise. And if exports rise, the current account will become more in balance and that will result in lessering the cost of capital. Also, if you are more productive, people will earn better. Income levels will rise. As income levels will rise, savings will rise. So more supply of capital will come in and cost of capital will fall. That is what the survey suggests. So that is why they say that higher domestic savings is what we should focus on which will come with labor productivity, corporate profitability and more retained savings. And if they are weak then you have high risk premium, currency depreciation expectations rising etc. So what should India focus on? India should be focusing on labor and firm level deregulation, logistics and infrastructure upgrades, R&D and technological capab capability building, integration into global value chains, sustained export growth. So what should be focusing on? Productivity growth, efficiency, efficiency improvement, ease of doing business and export promotion. If we can do that we'll again I repeat then we will have better current account exports risk premiumity supply of capital okay then FBI FBI from prelims point of view just keep in mind that why we have seen such high level of FBI outflow from India so First is underperformance of Indian equities share market perform global share market better perform outflow. Second is lot of policy uncertainty Trump's tariff etc. India not able to sign a deal with USA very soon. Third is rupee depreciation. I'm teaching something. Listen to me carefully. What India did between 9 2023 and 24 is it kept rupee value almost fixed at 8182. So what that meant was that many people who used to hedge their expenditure against rupee fluctuation stopped hedging. India's foreign exchange reserves jumped from $600 billion to $700 billion. While we did not have current account surplus, we did not have huge capital inflows. Still the valuation but still $600 billion to 700 billion India forex reserve when people stopped hedging a lot of hedge funds money started pouring into foreign exchange and that meant foreign exchange reserves went up that this rise in foreign exchange reserves is a is a signal that that there is more risk brewing up in the exchange market. We did not listen to that at that time. When last year 2024 November when RBI governorship changed and the new governor started allowing rupee to depreciate the market was not prepared for it. So the market overreacted you know expectation real exchange rate to 90. So people were very worried about rupee reaching 90. rupee was at 83 odd and that meant people started selling even more that let's quickly get rid of it. So we have we had an RBI FBI outflow creating currency depreciation and created by currency depreciation and then you will see Trump's tariff by the time so by the time we reached around September 2025 we had reached this 90 rupees value 89 rupees value so ideally the FBI outflow should have stopped there but by then the Trump's uncertaintities and the war in Middle East and all brewing up all that was something that played on FBI's mind and then further we had this pressure of FBI flowing out. So if you ask me in the longer run or even in the medium term I don't think FBI will keep going out of India. I'm expecting this year to be a positive one for FBI inflow into India RBI letup go down then it creates unnecessary market turbulence because the market starts factoring in your decisions. Just keep this in mind. Then of course US bond yields are today pretty elevated and mind you the risk spread Indian bond yield or US bond yield difference only 1.65% only 1.65%. So automatically US is a safer heaven people went to USA by December 25 this difference is back to around 2.5%. So again we can expect that some money will come into India through the bond market because again there's a risk spread between India and US risk spread given the risk in India given the risk in US what is the return India is giving compared to USA's return is the risk spread and then of course there is pressure on export oriented sectors because of the global deglobalization phase we are going through this I already told you India US 10ear debt dynamics uh and this part now of uh what we see is relaxation of FBI norms and India US trade discussions can help in more bringing more FBI into India. Today FBI assets in custody are 81.4 lakh cr but that is mainly because with dollar depreciation uh rupee depreciation the valuation has gone up and the FBI ownership in NSE equities has now shown a decline to 16.9% which means that there's a continuous consistent pulling out of FBI which the reasons we discussed on the previous slide. The domestic institutional investors are putting in a lot of money. Mutual funds and insurance companies but LIC SBI companies market pressure indirect pressure India shares ultimately shares valuation how much are my companies earning if my companies will earn better share valuation will be high outflow. A lot of money was going towards investment in in artificial intelligence and India did not have an artificial intelligence story till very late artificial intelligence story. So again that should help in getting some FBI into India but if you look at it yesterday I was teaching you that 80 odd% of investment 75% of fresh investment even in US market is in artificial intelligence sector and India did not have an AI story that was also a factor that FBI was flowing out. Now you know when we when we see this the domestic institutional investors now own more the domestic institutional investors own more than the the ownership of the FIS which is a very new thing in India graph fi have continuously earned more uh owned more than domestic institutional investors. So that's a new thing that we see happening in India and the share of mutual fund ownership is is rising uh on a as a trajectory. So we see that domestic institutional investors and mutual funds are holding more and more bonds in share you know financial assets in India now compared to the FBI. Our dependence on FBI and fluctuation because of FBI will also be reduced but again the valuation should depend on performance of the companies not on obligations to purchase etc. Then of course survey talks about gift city financial market gift city is Gujarat International Financial Technology City which is established as the new financial center of India and it is growing up very quickly on the financial as a financial center ladder. It's coming as a second to Mumbai now as an important ladder. A lot of uh you know lot of uh new developments have happened over there and and we see foreign foreign colleges being opened over there uh universities rather being opened over there. We see that a lot of FBI is pouring in over there. Foreign bank branches are being opened over there. So survey highlights just a couple of things there. A there is a unified regulator in gift city which results in better oversight and which results in easier idea of investment. achievements more than 1,000 entities registered. It's ranked 43rd in the global financial index up nine places in one year only and the fintech ranking is improved by 10 places in gift city of view city banking and credit operation. There are 38 international financial service center banking units with hundred billion plus assets in gift city. Now capital markets Monthly turnover has now gone up to $88 billion and cumulative derivatives trade at around $1351 billion. That's a big huge market you are looking at financial services aircrafting shiping or merchanting is allowed. Merchanting is allowed that is you can take commission and you can shift commodities from one country to another even if that ship is not touching Indian shores. So merchanting is allowed. Of course bullion trading gold and silver trading at a very fast level and 194 fund management entities with 310 schemes with 26 billion plus US dollar being managed. So this is a financial operations and the scale at which gift city is rising. Of course in 2025 there were two very important milestones three rather. One is Sri Lanka's DFC bank has lifted listed at gift city with green bonds on n international exchange. This is the first foreign corporate listing at gift city prelims point of view DFCC bank with lankan rupee 2.5 billion green bonds first foreign corporate listing at gift IFSC and the launch of foreign currency settlement system now which means realtime local settlement of foreign currency transactions between IFSC banking units which will encourage more and more banking investors to come to India and as I was telling you two Australian universities have set up branch campuses at gift IFSC offering courses in business analytics, cyber securityities, fintech etc. And two UK universities have also received in principle approvals. So these are things that have happened in 2025 you can add it in your current affairs as achievements in gift city. Then survey comes to pension sector and with rising aged population of India they say that by 2036 around 15% population of India will be in the pension group. So we need to focus more on a pension or pension fund regulatory and development authority is the is the regulatory body there to a to NPS system national pension system which is market linked cover covering government private sector unorganized sector and minor minor NPS 21 subscribers under management 16.1 lakh so NPS is a dominant theme in India with respect to pension management and between last 10 years it has grown at more than 9% for subscribers and more than 37% for asset under management means people are contributing a lot of money for their future pension things under NPS pension scheme is guaranteed minimum pension for low-inccome workers in case compounded annual growth rate is 43% for subscribers it is mainly for unorganized sector labor lesser level of people and asset under management is for at 64% % and then unified pension scheme launched in January 25 for central government employees which blends both NPS and OPS. I will be teaching you unified pension scheme as I told you in on our app uh in a separate session. And then there are other schemes like EPF and so on. Now what are the challenges? Coverage remains modest relative to workforce size. India's workforce size is 60 cr but people covering themselves directly in in pension funds in India is not even 10 cr which means not even one sixth of working population is fully covered with a pension fund why with informal jobs irregular incomes it becomes very difficult to do long-term contributions and pension assets remain very low in India hardly 15 to 20% of GDP compared to developed economies where it is 60 100%. And again there is EPFO, PFRDA, state insurance prevention bodies. So too many people resulting in diversion you know disintegration and discouraging people from going for a unified pension system. So what should we do? Simplify the digital onboarding Aadhaar based ENPS flexible microcontribution models for gig and informal workers. So flexible model of payment will mean less money in the year you earn less more money in the year you earn more and that will keep people interested and encouraged. And then there should be interoperability. I should shift from NPS to APY, APY to NPS. I should shift from NPS to UPS. Whatever I choose, I could shift to that will encourage more and more people to enter because they will know okay wherever more profit is earned I can shift that side. And of course we will need more actuarial frameworks. Unfortunately acties is a as a field of study has also not picked up very well in India till now. It needed for both pension and insurance. So we need to make sure because pension or insurance importance long-term funding is based on pension and insurance funds. If pension funds are going good, you get funding for 30 years, 35 years. Insurance funds are going good, you get funding for 30 years, 35 years. And these funds can be used for infrastructure development of the company country, housing market development of the country because these things need long-term funding. Then of course they go to insurance sector and they say that we have a vision that there should be insurance for all by 2047. So there is huge premium income received by India. Life insurance accounts for 91% of asset under management and 75% of premium income. Life non-life insurance it is health insurance that that has overtaken motor insurance now. But again there is a point here. We still don't insure ourselves beyond life insurance much and insurance penetration of India is still low. Insurance penetration total insurance premium paid divided by total GDP of the country. So insurance penetration of India is still very low. We are not even touching 4% which is something we should be worried about. Now there is more accessibility and there are more distribution networks being established but and non-life insurance is also growing in India but the pace of growth is much lesser compared to what we would have liked. Now some some things have been done by the government like GST exemption on life and individual health policies affordability then pradhan mantri gi bay class not 26.32 cr enrollments 10 lakh claims paid add data point in the class notes on premi financial inclusion month 56 cr enrollment 1.73 lakh claims paid class add then subkaima this is an amendment of insurance act which plans that make it easy to do business and promote insurance for all and FDI limit has been increased by government to 100% now to attract capital as well as good technology in insurance ease of doing business it is about steps taken by government to promote insurance development in India steps taken by government to promote insurance development in India Yeah, this slide and this slide. So, what has been done for ease of doing business? One-time registration for insurance intermediaries. So, one time registration. So that gives flexibility. Registration as an insurance intermediary LIC intermediation. All right. Then of course IDI approved threshold for share transfers has been raised from 1% to 5%. And this is again good that now there's a larger threshold to share the transfers which will mean that I mean share transfers to be raised which will mean that more funds can be raised by the companies without having too much of paperwork to be done and net owned fund requirements for foreign insurers has been reduced from 5,000 K to 1,000 Kourage to encourage more people to come and invest. Then another step taken is policyholder protection that is create creating an education and protection fund for policy holders. IDI empowered with disorggement powers. So IDI doesn't have to seek further permission. Now they can disorgge without you know seeking further permissions. Maximum penalty for non-compliance increased from 1 cr to 10 cr extended to intermediaries. insurance non-compliance agents be included so that false promises and negative uh you know sale can be stopped and then there is data protection to by giving a legal backing through digital person data protection act what are the challenges as I told you the insurance penetration has now been even below 4% and that is something that we should be worried about insurance density has increased to $97. Last year it was $93. Insurance penetration last year was 3.9%, now it is 3.7%. So penetration has gone down, density has increased. Penetration total amount of insurance premium paid divided by total GDP into 100. Density total amount of insurance premium paid divided by total population. All right, that is why it is in dollar per person terms. Also the acquisition and distribution costs are high which means that uninsured missing middle is is you know is is very uh very high that you know companies are unable to expand into medium-scale system which is still uninsured but the but the agency costs are so high that they are unable to do that. Agency cost means paying the intermediaries, setting up the office, create making reaching the formalities and that is discouraging insurance development in India. So these are the challenges for it. What should be done? Reduce the distribution cost through digitization mutual fund shares brokerhood come improve affordability. Make insurance premium cheaper. Make people more used to taking insurance and widen the risk pool as in mix things. insurance combined insurance and that will encourage more people to take insurance. So in conclusion survey says that you know there's global uncertainty technological change but India has strengthened its financial regulation. It has shifted to proactive and consultative regulation. SEBI has modernized governance. IRDI has award adopted principal based regulation. PI PFRD has expanded its uh pension inclusion with Ishra for gig workers and FPOMSmemes. So India has been working towards improving it. We are going a little bit for international validation. We see that the financial sector assessment program by IMF and World Bank has found India's financial system very resilient and diversified and financial sector assets now reached 187% of GDP. Now this is what we should get worried about. This is over financialization. In a relatively less rich country like India, we are a middle- inome country. Financial asset 187% of GDP the ratio between real asset and nominal valuation of capital is now reaching almost 1 is to2. So tomorrow god forbid if there is any challenge in the financial market how do we pay back the the the people who are holding these financial assets and that will be a serious challenge India will have to face so we should be conscious we can go for financialization but people should be informed there should not be only short-term discourse people should be looking for long-term ideas of investment insurance and pension should be promoted but taking short-term gains through equity and so on should be discouraged. managed then of course government has given a theme of finance for Vix Bharat. So in that case it is about not only viewing finance as funding but about mobilizing it through all sections of population allocating it for best efficient use and sustaining it over a long period of time. So you know if we do things simpler serviceoriented taxation time bound dispute resolution decriminalization of minor technical offenses and transparent proportionate administrative processes this is something one thing practiced by government certaintity and predictability. So steps taken to make finance more inclusive. Then recasting financial regulation which we have already discussed in making sure there is you know single window making sure all kind of financial entities are looked into with the same kind of prism or and also bringing convergence in financial intermediation and also from entity based to activity based supervision. Entity based, insurance company, mutual fund company, bank activity based, deponds to the supervision. It should be based on what activity I am doing not on the basis of which sector of the financial system I belong to. So that it is easy to regulate the activity because ultimately it's the activity which will have impact on people. All right. And then towards proportionality that you should have a risk calibrated oversight. Don't take over risk and don't become too defensive. That will happen when we inform our people better when we give them enough capacity to do research on particular events. When we when we create possible safety valves so that people suddenly don't lose money and so on. All right. So that is why they say that if there is better inter agency corporation cooperation we will be able to prevent arbitrage better then deepen long-term finance that is corporate bond market should be allowed to grow better and as I told you these are the methods by by which corporate bond market can go better tax treatment of debt capital gains similarly credit enhancement for mid-rated issuers encourage the bidrated issuers to get easier loans through bond market standardized is the securitization frameworks whether the bonds are issued by big players, small players, government, private, there should be one standard method rate of discussion, yield rate decision rather than multiple things for multiple players. Similarly, municipal bond capacity to be made stronger when I'll teach you budget very soon. I will be bringing this up in this year's budget. They have taken steps to promote municipal bond development in India so that municipal corporations can also raise money through the bond market. greater participation by pension insurance funds and faster insolvency resolution. How do you diversify the ecosystem? By bringing mix of banks, NBFC's, bond issuers, corporate lenders and so on. This will help in diversify systemic risk NBFC protect real estate banks support. So a diversified market reduces the systemic risk. One part of the system in trouble the other part can cover up reduces capital costs because then it will there will be diversified risk sharing portfolios will be diversified. So capital costs will become that much lesser. It will improve capital allocation. Whichever sector gives you higher return, capital can flow towards it because they are all integrated and support infrastructure, climate finance and manufacturing growth. Why? Because now financing will be available at each level from short-term to medium-term to long-term. So people can program themselves fund insurance company is 5 years finance deventures 5 years. So there will be diversification leading to better quality funding for all. So the basic idea is create good regulation, diversify the market, give easier laws to people, promote single window for people in finance, make finance resilient, inclusive and efficient. That is the basic thing. Thank you all for supporting me throughout. I love you all. Hope to see you very soon with the next chapter. Thank you. Bye-bye. God bless you all. [music]