M Rajeshwar Rao, Deputy Governor, Reserve Bank of India, has warned that greater challenges will emerge as the markets become more developed and interconnected, and as the range of products expand.

Delivering a keynote address on ‘Self-Regulation in Financial Markets – Looking Back and Looking Ahead’ in Egypt, the deputy governor said, “Going ahead, greater challenges will emerge as the markets become more developed and interconnected, and as the range of products expand.” He said new frontiers would also emerge as Indian banks expand their presence in offshore markets, non-resident participation in domestic markets grows, and as technological changes continue to transform the manner in which markets function.

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Foreign exchange market participants will have to prepare themselves to manage the changes and the associated risks, and the Foreign Exchange Dealers’ Association of India (FEDAI) will have to play a leading and constructive role in these endeavours, according to a Reserve Bank of India statement released on Thursday.

“In a constantly evolving world where change is the only constant, the journey of the Indian foreign exchange market over the last few decades has been one of continuous development and innovation,” he said on Sunday.

He said the Reserve Bank remains committed to continuously move ahead at a steady pace in line with the changing macro-financial environment — globally and domestically.

The deputy governor said as the economy grows and becomes more developed, the scope of participation in foreign exchange markets would change.

“With the increasing integration of the economy with the rest of the world, more and more entities are likely to, directly or indirectly, get exposed to foreign exchange risks. There are likely to be demands for permitting hedging of economic exposures,” the deputy governor said, adding, “While this may be tricky given the current extent of capital account convertibility, the possibility of such hedging being permitted over a period of time as we progress further down the path of capital account convertibility needs to be carefully evaluated.”