They must strike a balance between openness to global capital flows and the need to insulate the domestic economy from volatile external shocks, it said.
Moreover, given India’s heterogeneous financial landscape, where sophisticated metropolitan markets coexist alongside underserved rural segments, regulators must exercise differentiated supervision: a shorter leash for emerging or fragile segments prone to excessive risk-taking and greater latitude for mature markets, the survey said.
“ In this context, so far, India’s financial sector regulators have managed the balancing act deftly,” it said.
Banks remain dominant, despite not being adequately equipped to finance infrastructure, energy transition, and large manufacturing projects with long horizons, the survey said.
India’s development aspirations require a diversified ecosystem where well-managed banks compete alongside NBFCs, fintechs, and market-based lenders, it said.
Diversification distributes risk and builds resilience, lessening vulnerability to shocks, the survey noted.
Diversified financial ecosystem calls for regulatory coordination, as, currently, India’s financial system is supervised by domain-specific regulators, it said.
Financial innovation increasingly blurs these boundaries. Banks distribute insurance and mutual funds; NBFCs perform functions similar to those of banks; fintechs intermediate credit and payments, it pointed out.
To avoid regulatory arbitrage, inconsistency, and enforcement blind spots, regulation should shift from entity-based to activity-based frameworks, focusing on the risk and function of transactions rather than institutional labels, the survey said.
When entities engage in similar activities, they should face proportionate regulatory oversight based on their risk exposure. This promotes equality of treatment, competition, and innovation while ensuring systemic stability, it said.
Finally, enhanced inter-agency coordination is crucial for effective oversight of increasingly complex and interconnected financial entities, the survey said.
The goal now must be to proportionality-calibrate regulation to risk and contestability, ensuring fair competition across entities and activities, it said.
“To finance sustained growth, India must strengthen long-term capital markets. Corporate bond markets remain shallow and illiquid, dominated by top-rated issuers. Securitisation is limited, municipal bonds are underdeveloped, and pension and insurance funds remain conservative investors due to regulatory and cultural inertia,” the survey said.
It said a coordinated agenda could address these barriers by rationalising tax treatment of debt instruments, creating credit enhancement facilities for lower-rated issuers and standardising securitisation structures and disclosures.
Building municipal financial capacity and pooled bond mechanisms, revising investment guidelines for long-term funds and strengthening financial market infrastructure and insolvency systems, were the other measures suggested in the survey.
Such reforms would supply the scale and maturity needed for infrastructure and climate financing while lowering the economy’s cost of capital, it said.
The reforms taken together aim to shape a financial system that is stable yet competitive, diversified yet resilient, and innovation-friendly yet safe, the survey said.
Banks will remain central, but they must be seen as one part of a richer ecosystem that includes non-bank intermediaries and markets. Such a system reduces capital costs, expands financing options, facilitates structural transformation, and enhances the economy’s adaptive capacity, it said.
