Outgoing deputy governor of the Reserve Bank of India Viral Acharya credited flexible inflation targeting, low crude prices and efficient food supply management for successful taming of headline inflation in recent years Saturday. The RBI shifted to aflexible inflation targeting with a headline target of 4 percent(+/- 2 per cent) when the Monetary Policy Committee (MPC) was instituted in 2016.
“The important reform of flexible inflation targeting, helped by low oil prices and better food supply management, has kept the headline inflation under control during the last five years, relative to the mandated target,” Acharya was quoted as saying in a statement on RBI website. Acharya, whose resignation was announced early this week, delivered a lecture on `Development of viable capital markets- The Indian Experience’ at the Indian School of Business, Hyderabad. He said two preconditions for macro-economic stability — stable growth and low inflation – which are also necessary for financialisation of savings and capital market development, are now in place in the country.
The deputy governor said major segments of capital markets – central government securities (G-Sec), state development loans (SDL), corporate bond market and equity markets – have experienced consistent growth during the past few decades in terms of primary issuance, market capitalisation and trading volumes in the secondary market.
Though the equity market remains the largest segment, G-Secs, SDL and corporate bond markets have also grown steadily. The monetary authority has been making a conscious and continuous effort to expand the investor base and thereby increase the liquidity in the markets it regulates, while preserving financial stability. An expanding investor base increases the diversity in the market and efforts in this direction need to be sustained, with a particular focus on the domestic institutional investor base, Acharya, who will be leaving the Mint Road on July 23, said.
Improving pension and insurance coverage for households can be a priority as it not only leads to social welfare outcomes, but also leads to a stronger and more stable investor base for capital markets, he noted. “Better financialisation of household savings could be a catalyst for retail participation in markets, which in turn can provide a boost to collective investment vehicles such as mutual funds and alternative investment funds,” Acharya said.
Liquidity in the secondary market Gilts has noticeably improved over the past decade and the average daily volume in the G-Secs and SDL markets has remained higher than the combined volumeof the corporate bonds and equity cash markets, he said. The corporate bonds market has grown over the years to USD 447 billion of outstanding stock as of March 2019, clipping at an annualised rate of 13.5 percent during the last four years. Issuances are predominantly through private placements and dominated by high credit issuers.
In the just concluded fiscal, as much as 79 percent of the issuances were by entities rated A or higher. Secondary market trading has also picked up in the recent past, with trading volume jumping from USD 170 billion in FY15 to USD 267 billion in FY19,he said. “Deep and liquid complementary markets like the repo and derivatives play a crucial role in growing the cash market as they help investors in funding and hedging,” he said.
Over the past few years, the RBI has taken many measures to help develop the repo markets for both government securities and corporate bonds. Consistent investment interest by domestic institutions like pension funds and insurance funds as well as foreign portfolio investors has also played important role in developing the corporate bond market. He said with greater confidence in time-bound and efficient resolutions under the bankruptcy laws, foreign investors are likely to explore investment in sub-investment grade and distressed corporate assets. He further said with the bankruptcy law, the legal framework for financial regulation is also moving closer to being comprehensive and effective in the context of non-financial corporate borrowers.
“However, the lack of a bankruptcy resolution framework for non-bank financial entities remains a crucial gap that deserves prompt attention of the authorities,” Acharya added.