The National Stock Exchange of India, located in Mumbai, is the country’s largest stock exchange. It has more than 1,700 listed companies whose market capitalization exceeds $2 trillion. Founded in 1993 as India’s first electronic exchange, NSE has grown rapidly to become one of the world’s top three stock exchanges by transaction volume.

Vikram Limaye took over as NSE’s CEO in July 2017. A former CEO of IDFC (whom Knowledge at Wharton interviewed in that role in 2010), he took charge at NSE last year as part of a leadership change triggered by a controversy. At that time, NSE was accused of allowing some brokers preferential access, which gave them an advantage over others in high frequency algorithmic trading. One of Limaye’s tasks during the past year has been to steer NSE through this turbulence and to restore a sense of transparency and rebuild trust among stakeholders.

Limaye spoke with Knowledge at Wharton during a recent visit to Philadelphia. The conversation covered the state of the Indian economy; NSE’s efforts to increase access to capital markets and make them more inclusive; the phenomenal growth of India’s asset management industry and its role in taming volatility; and lessons that can be learned from NSE’s efforts to rebuild confidence after a crisis.

An edited version of the interview appears below.

Knowledge at Wharton: These days, conversations about the Indian economy often seem to gravitate towards the declining value of the rupee. Its value has been hovering above 70 to the dollar [in early September], compared with the low 60s a year ago. What are the factors behind this depreciation? What does it say about the state of the Indian economy?

Vikram Limaye: The Indian economy is doing fine. Its growth rate has been between 6.5% and 7.5% — a healthy rate relative to any other economy, including China’s. Over the last three years, [India’s] currency has been stable and has strengthened a bit compared to what it was four or five years ago. Inflation in India has been between 4.5% and 5% relative to U.S. inflation, which has been quite low in the last three years (between 0.7% and 2.9%).

The rupee has been stable to appreciating [in value]. Although it has depreciated by 8%-10% over the last month or so, this is more about catching up to its true value rather than a depreciation [caused by] macroeconomic factors. [The rupee’s current value] is largely dictated by international events, given what’s going on in Turkey, the [investment] outflows from emerging markets, and [rising] oil prices [that are] a negative for India in terms of its current account deficit.

“The inherent strength of the Indian economy and the fact that India will continue to remain an attractive investment destination will balance out some of the concerns.”

Knowledge at Wharton: One result of a sharp currency depreciation is that foreign investors sometimes rush to take money out of the country. Between April and June this year, for example, foreign investors pulled about $9 billion out of the Indian stock and bond markets. Could this capital flight intensify if the rupee were to remain low?

Limaye: Whenever you’re faced with a depreciating currency, you run the risk that people will pull out money. The inherent strength of the Indian economy and the fact that India will continue to remain an attractive investment destination will balance out some of those concerns. That includes what I just described as international factors and the catch-up that has resulted in the depreciation — nothing that is specific to India that should cause anyone any alarm.

The pullout of FII (foreign institutional investors) money from [the Indian stock] markets was happening even before the currency depreciated. That had to do with just a reversal of flows from emerging markets — money was moving back to the U.S. and developed markets, given the growth prospects and rising interest rates in the U.S. I don’t think the currency depreciation aspect will exacerbate the [external] flows going forward. Also, the strength of [India’s] domestic asset management industry over the last two or three years has been a huge structural change for the domestic markets.

Knowledge at Wharton: How so?

Limaye: Three or four years ago, if you had built in the same kind of foreign outflows from markets, the currency’s value would have been dramatically different. The stock markets would have reacted very negatively. The values of the indices and stocks would have been at very different levels. The reason was that we were very dependent on foreign flows [into the stock] markets and because the buying power of the domestic asset management industry was weak.

Over the last four years, the growth in the asset management industry has been phenomenal; it has almost doubled in terms of assets under management to about Rs. 23 lakh crores ($330 billion). That is still small relative to the domestic savings because only about 5% of household savings go into markets. We have a long way to go.

“I don’t think we would be able to achieve our growth potential if we didn’t get market development right and we were only dependent on bank financing for growth.”

The other positive about the structural change in the asset management industry is that historically, retail investors tried to time the market. They came in with lump sum funds being allocated to markets. Now they’re investing through systematic investment plans (SIPs) — or investing small sums of money at regular intervals – fortnightly, monthly, quarterly or whatever. With this approach, you are not trying to time the market, but investing through ups and downs. You’re averaging your price range. As a result, the experience of investors has been positive relative to the historical situation. Mutual funds have been getting almost a billion dollars a month in systematic investment flows. That has cushioned the volatility that would have otherwise been much higher with the FII outflows from India.

Knowledge at Wharton: A recent report from the IMF (International Monetary Fund) compared the Indian economy to an elephant that is starting to run. Do you agree with that assessment?

Limaye:  The Indian government has undertaken three or four important structural reforms, the benefits of which I hope we will see over the next few years. One is GST (the Goods and Services Tax, introduced in July 2017, which replaced multiple cascading central and state indirect taxes), which hopefully they continue to rationalize and simplify. It will be a huge multiplier and will help ease of doing business in India.

The second is the [Insolvency and] Bankruptcy Code, which again was required for a long time in terms of asset resolution and enabling banks to focus on new business as opposed to getting caught up with bad loans and bad assets. It’s still going through an adjustment period and some stabilization as more and more bankruptcy cases go through the system. But it will stabilize, and everyone is hopeful that it will succeed. Various other things have been tried in the past, and they have failed.

The third is a real estate regulatory bill that was passed, which [seeks to ensure that] developers adhere to certain standards and that the common man investing in real estate can feel secure. Real estate is an important part of the economy, and unless you get some standards in [place], that sector will continue to underperform.

Knowledge at Wharton: Everything you said about the economy sounds positive. I wonder if you see any areas of weakness. Specifically, are you concerned about the banking sector?

Limaye: Yes, the asset quality and the capitalization of banks is a concern, because our economy is largely bank-financed. My primary focus at NSE is the development of [capital] markets. I don’t think we would be able to achieve our growth potential if we didn’t get market development right and we were only dependent on bank financing for growth.

The banks are constrained because asset resolution has taken a long time. As a result, the public sector banks are undercapitalized, given the size of the asset quality problem. My hope is that with what’s going on with the bankruptcy process, as the larger cases get sorted out, it will free up capital for the banks. They do require more capital from the government and other shareholders. But resolving the assets is important, because it takes up a lot of management time.

What has happened as part of this process is a certain degree of risk aversion has crept into the Indian system. That risk aversion leads to banks being very conservative in lending. That is a cause for concern because access to capital is important if you want to grow at higher rates. India’s public sector banks [account for] 70% of the banking system. I don’t see this situation in terms of capitalization, asset quality and risk aversion all getting sorted out in the immediate future. These things will take time to sort out.

Knowledge at Wharton: Based on what you’ve said, both on the positive side and some of the concerns on the banking side, what implications do you think this will have for India’s stock markets and how they perform over the next 12 to 18 months? Also, how do you think India will compare with other emerging markets in this respect?

Limaye: From a growth perspective, we’re already doing much better than most other emerging markets. [Corporate] results for the last quarter show broad-based growth, which was not the case even a year ago. You’re now seeing companies in various sectors demonstrating growth, and the results of the last quarter also indicate that earnings growth is on track.

A year ago, I would have said that the macro picture was strong, and the micro picture was, relatively speaking, weak. Today, the micro picture seems to be improving in terms of earnings growth, but the macro picture seems to have deteriorated given the oil price increase and its impact on the current account deficit and currency and the potential increase in fiscal deficit. There is geopolitical risk [such as in] tariff-related issues and what that means for India. Unless we get private investment and export growth, overall economic growth will be constrained. The macro picture faces some headwinds.

“Only about 5% of household savings go into markets. We have a long way to go.”

Knowledge at Wharton: Some people argue that mid-cap and small-cap stocks are floundering, and all the growth in the Sensex (the Bombay Stock Exchange’s 30-share sensitive index) as well as the Nifty (the NSE’s top 50 stocks) is from large-cap stocks. Where do you see room for growth?

Limaye: It is true that the index does not really reflect what’s going on in terms of individual stock prices. The index does get influenced by a few large stocks, which if they do well – and depending on their weight – will move the index, although many other stocks could be floundering.

It is true that the mid-cap and small-cap stocks have taken a beating over the last three to four months. These will take some time to recover. You could argue that an adjustment has occurred. Five or six months ago, people would have said mid-cap stocks seemed overvalued. Now they probably reflect valuations that are more in line with growth prospects at reasonable [earnings] multiples.

The underlying economy seems to indicate that we’re seeing growth across various sectors. The SME and mid-cap spaces are very important for the Indian economy – not only from a growth perspective, but even from a jobs perspective. The government has many programs to encourage SMEs. As an exchange, we have done our bit to try and facilitate access to capital for SMEs. We have a dedicated platform called NSE Emerge, which is for IPOs of SMEs. More than 160 SMEs are already listed on that platform. That’s as far as equity-raising is concerned. We also have a receivables discounting platform in a joint venture with SIDBI (Small Industries Development Bank of India), again to encourage working capital financing for SMEs.

Knowledge at Wharton: Turning now from the economy to the NSE – the NSE is India’s largest stock exchange by market capitalization, as well as by the number of companies listed. Could you explain some of the factors that have helped drive NSE’s growth? What could other stock exchanges around the world learn from NSE’s experience?

Limaye: The growth of NSE has largely to do with several aspects that are essential for market development. NSE was a disruptor because it came into being as an electronic exchange in India. It was an exchange that was not owned by brokers, so there was no demutualization process the way other exchanges which were broker-owned. It was also professionally run with an institutional shareholder base. It facilitated liquidity and price discovery in a very different way.

The regulator played a role, too. The Securities and Exchange Board of India (SEBI) became effective around the same time [in 1992]. Trust in markets had to be established. The evolution of the regulatory environment was important in NSE’s success. Markets can only develop if the economy grows, and liberalization [introduced in 1991] helped the Indian economy grow, and companies that went public for capital-raising. Liberalization also facilitated foreign flows. The loosening of restrictions surrounding investing in India helped foreign investment flows into the markets. Transparency and the fact that you had well regulated markets certainly enhanced trust in markets – domestic trust as well as international trust.

NSE’s own efforts in terms of technological innovation, investor education, investor awareness, product development and the growth of the derivatives market also played an important role in where we are in terms of market share and size. We are among the top three exchanges in the world in terms of trading volumes. Technology had a very important role to play; and it is all indigenous technology that NSE developed. It provides a lot of throughput at very low latency.

“You could argue that an adjustment has occurred; five or six months ago, people would have said mid-caps seemed overvalued.”

Knowledge at Wharton: Some estimates suggest that only 2% of the people in India invest in stocks, compared with 10% in China and 27% in the U.S. What should be done to make stock markets more inclusive? How do you see the role of financial education in this regard?

Limaye: It’s very critical. This is an ongoing process. Only about 5% of household savings are in the market, but five years ago, it was probably 3%. One could argue that it has moved up 70%, but it’s still low relative to emerging markets, which are in the 10%-15% range, and the developed markets are in the 25%-30% range. We have a long way to go. Investor awareness and education are exceedingly important. The growth of the asset management industry is an important structural change because that is an indirect way for people to invest in the markets.

The penetration level can only pick up with more investor education and awareness, as well as with simplified products, whether it is the growth of the ETF (exchange-traded funds) market or all the efforts that the mutual fund industry, the exchanges and SEBI have taken to facilitate awareness of markets and market-linked products. Development of new markets is also important. For instance, the fixed income market is at a nascent stage. And recent initiatives by the government to develop the bond market including retail investment in government bonds are an important development.

Knowledge at Wharton: Does the NSE plan to go public soon? What will this mean for NSE and for investors?

Limaye: There are some legacy regulatory issues that need to get sorted out before we go public. I don’t have a definitive timeline in terms of how long it will take to resolve those issues with SEBI.

Knowledge at Wharton: What are those issues?

Limaye: It had to do with co-location-related access that was granted to a variety of brokers. There was a whistle-blower allegation that certain brokers were given some preferential access as part of the co-location service that was offered. The process of investigations has been completed, and SEBI will need to decide on its course of action.

Knowledge at Wharton: You spoke about the situation created by preferential access to the co-location service for certain brokers. You joined NSE at a time of a leadership vacuum after the departure of Chitra Ramkrishna, who was managing director and CEO, and Ravi Narain, who was vice chairman. Could you tell us about the situation you inherited? How did you deal with it? What lessons about managing through a crisis did this experience teach you that might benefit other leaders?

Limaye: The challenge in coming into this role was really about stakeholder management. I found that stakeholder relationships across the board required work, [and they included] regulators, government, media, clients and certainly employees. Every stakeholder had to be worked on in terms of making sure that the relationship was where it needed to be. Part of it has to do with accessibility, transparency and trust. You had to give confidence to employees that we’re on the right path, and that we will resolve the issue and move on. Shareholders were also not happy.

“Perceptions don’t change overnight. It requires sustained effort, and you’ve got to demonstrate it through actions.”

Knowledge at Wharton: What steps did you take to deal with the different stakeholders?

Limaye: Different people had to be dealt with in different ways, so each one had their own issues. Shareholders had an issue about lack of access to management, not being able to get information and transparency. The media had issues about, again, not being able to get any response or not being able to interact with management on issues or even in terms of what they could learn about markets. Regulators had issues surrounding how the NSE came across in terms of cooperation and transparency.

Perceptions don’t change overnight. It requires sustained effort, and you’ve got to demonstrate it through actions. You can say all the good stuff, but if the organization doesn’t respond, then it doesn’t help. There was a perception about NSE being too heavy-handed, arrogant, inaccessible and not solution-oriented.

All those things had to change. We had to work across multiple dimensions and multiple issues, depending on which stakeholder we were talking to. And it required cultural change within the organization. Cultural change, again, never happens overnight. It’s still a work in progress … and it has to be driven from the top. How you come across is exceedingly important, because it sends a very strong message. Also, what you say is as important as what you do in practice. We’ve made significant progress over the last year, in terms of stakeholder relationships and trying to change how we are perceived.

Knowledge at Wharton: How do you define success?

Limaye: If I were to reflect 20 years from now on whether I’ve been successful or not, I would ask: Have I done my best for the institution that I’ve worked for? Will people say that here’s someone who always put institutional interests ahead of personal interests? [Was I viewed as] being trustworthy and someone who had a strong value system? Twenty years from now, hopefully people will continue to want to have a relationship with me, not because of the position I occupied, but because of who I am as a person and how I’ve dealt with them.