Reserve Bank has also permitted single-name credit default swaps (CDS) in India for hedging credit risk separately. Since the launch of the product, however, only few trades have been executed. Various reasons have been attributed for the lack of trading interest in CDS in India. One of them is that banks are yet to put in place internal policies for trading in CDS.
Inside liquidity can also be insufficient, as we saw after the crisis when the chain of inside liquidity creation collapsed, markets froze, fire sales reduced asset values and recession expectations affected estimates of future income. That is when public intervention becomes necessary to substitute at least part of the liquidity needed to sustain the financial sector and economic activity.