The Securities and Exchange Board of India executive director R K Nair on Saturday said the Reserve Bank of India's [Get Quote] policies on interest rates will determine the movement in the domestic capital market. The central bank will Tuesday unveil its mid-term review of the annual monetary policy.

"I believe interest rates (to be announced in the mid-term review) will play an important role in determining future move of stock markets," Nair said in his inaugural speech at the Investors' Conference organised by the Association of NSE members of India.

Nair's comments came at a time when the stock market is going through huge fluctuations. As on October 5, the benchmark BSE index had risen 12 per cent month-on-month to an unprecedented high of 8821.84. However, it went on to lose all the gains made in the following 10 sessions.

Nair said over the past few years, India has become the preferred destination for foreign institutional investors in the equity markets. Foreign direct investment had also been vibrant. However, the debt market has not seen a similar buoyancy, he said.

Nair said world over, the turnover in the debt market is much higher than in equity, but in India the trend is quite the opposite. "Debt market in India is active mainly in Mumbai... Investors' associations should attempt to spread it to other cities like Delhi and Kolkata," he said.

He also stressed the need for popularising the derivatives segment. "Derivatives can reduce costs and risks for investors and issuers," he said.

Underscoring the impact of interest rates on the market, Nair said the bull-run of 1991 and 2002 had fizzled out due to high interest rates.