Shikha Sharma: Deepening markets

RBI ANNUAL POLICY 2004-05/ GUEST COLUMNS

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Shikha Sharma
CEO & MD
ICICI Prudential Life Insurance

The RBI has emphasised the need for a flexible interest rate regime by balancing the inflationary pressures, the growth imperatives and the global developments. Key interest rates like the bank rate and repo rate have been kept unchanged, and there is a clear intent to keep the interest rate at levels conducive to growth.

On the macroeconomic front, the GDP growth target is 6.5-7.0 per cent for 2004-05 against the 2003-04 rate of 8.1 per cent, which was led by a good monsoon and the spurt in agricultural growth. Such a target should be achievable, especially with the RBI's commitment to provide adequate liquidity to meet credit growth and support investment demand.

With the RBI expecting inflation to be in the range of about 5 per cent, it is unlikely to be a cause for concern this year.

However, it is necessary to keep a close watch on global developments and to keep a firm control on inflationary expectations. The overhang of oil prices and domestic liquidity could put an upward pressure on inflation, but the expectations of normal monsoons and reasonable level of food stocks provide a fairly comfortable cushion for India.

Another encouraging move is the emphasis given to the credit delivery mechanism through steps such as treating investment by banks in securitised assets as priority sector lending, widening the gamut of infrastructure lending and restructuring the RRBs and co-operative banks. Other regulators like Irda could also carry these initiatives forward, by liberalising their definition of infrastructure investments.

The efficiency of the market is likely to be considerably enhanced with the introduction of capital index bonds, long-term bonds for infrastructure financing by banks and OTC derivatives clearing by CCIL.

This step will also facilitate insurance companies to offer inflation-hedged annuities to their retail customers.

The technology upgradation measures would improve the money flow between market participants and also allow the implementation of T+1 settlement on exchanges.

Overall, the RBI governor has presented a policy directed at strengthening the institutional framework of Indian financial system and maintaining the requisite policy flexibility to manage macro stability of India.