Efforts to build partnership between the Government and BFSI Regulators
In a democratic set-up, it is important for the financial regulators to be catalyst to Government's efforts to improve economic productivity (and efficiency) for uplift of social well-being (and to dilute inequalities). In this context, role of RBI, SEBI and IRDA are very critical, and should be seen walking together with the Finance Ministry (and the Government).
As elected representatives of the people, the Government is answerable, responsible and accountable to the vote bank; hence it is not unfair to allow the Government to set targets on macroeconomic fundamentals and the tolerance (or comfort) zone, which the regulators should work on. The agenda for the regulators is to frame such rules that would help to achieve equilibrium in demand-supply, growth-inflation, CAD/exchange rate - interest rate, consumption-investment etc to achieve the common agenda - economic value creation for social prosperity!
Aggressive targets, but not over ambitious
The set targets for FY16-FY19 looks great to carry India optimism into the next decade beyond May 2019, when Modi will submit his score card to the vote bank for extension for his 2nd term. The achievement of the set targets would obviously need joint efforts of the Government and the financial regulators to facilitate execution through aggressive out-of-the-box creative (and innovative) measures:
Targets through FY16-FY19:
GDP growth : 8.0-10.0%
Fiscal Deficit : 3.0-3.9%
CPI inflation : 4.0-6.0%
CAD : 0-1.5%
If these numbers trend into the right (and desirable) direction, then there is no stopping for India joining the elite super power group of countries.
What is expected from the RBI
RBI has now good comfort on the CPI (currently steady around mid-point of 4-6% comfort zone), but seen unsettled on upward revision in FY16 fiscal deficit budget estimate from 3.6 to 3.9% of GDP. There are reasons to acknowledge this stance as one-off and long term positive: (a) to adjust for previous years window-dress, it's one-time sacrifice without continuing with financial adjustments to achieve set target and (b) sacrifice on fiscal deficit for productive economic investment is seen as positive. RBI's concerns on Rupee exchange rate against squeeze in interest rate differential is not relevant now against expectation of long term stability in Brent Crude at $50-80 and CAD easing to historic low's, not ruling out turnaround into CAS if "Make-in-India" agenda drives exports.
RBI has major role to play to support the Government:
(a) Driving the operating policy (Repo) rate into lower end of 7-8% tolerance zone maintaining spread of 2% between Repo and CPI rate to guide balance between investors-borrowers, consumption-investment, FII appetite-exit and stay competitive to pull-in long term inflows. If all goes well with CPI into 4%, there would be need to shift the operating policy rate from Repo to Reverse Repo rate maintaining system liquidity in surplus mode.
(b) It is an important agenda for RBI to divert liquidity from risk-off investments to core sectors that are starving for cash. It is also important to provide push-triggers while the business viability is work-in-progress till monies start chasing these opportunities. The push factors are from providing cost/yield advantage and inclusion of lending to these sectors as priority to economic growth. Government has shown the way through flagging infrastructure focus for FY16-FY19 as growth-investment-consumption drivers, and its time for RBI to give its weight in support.
Time for SEBI to activate capital markets as funding engine for growth
SEBI has done a lot in upgrading the financial infrastructure in the capital market through ensuring transparency, fair-play and building tight control mechanism around operations, risk management and compliance. While there is robust back end, it is time to focus on the front end business to bridge effective bond between investors and borrowers through development of robust primary and secondary markets. At this stage, capital market (equity and debt) are easily accessible to the top-end users (who are already chased by financial intermediaries). The flow of monies to core sectors and small & medium enterprises is insignificant.
SEBI has major role to play to broaden and deepen the capital market:
(a) There is need to create 3-tier platform retaining the existing coverage and to expand coverage for SMEs (to support manufacturing sector) and infrastructure sector (to release non-credit funding to revive existing projects and for capacity expansion).
(b) The existing product coverage are mostly plain-vanilla in nature; risk-reward is not equally distributed between the issuers and investors, risk being heavy on the investor with upside retained by investors. It is time to turn creative and innovative in pushing the issuers (and Asset Managers) to facilitate (and upgrade) product manufacturing skills for higher investor participation. The issue is not on availability of liquidity (both domestic and external), while the concerns are in channeling the money to where it is required. Lot is to be done as the first step to pull-in monies to infrastructure sector through IDF (debt focus) and AIF (equity focus).
Insurance companies to emerge as major funding engine to infrastructure growth
The liability profile of Insurance companies is the best fit for infrastructure funding to build matched maturing asset - liability profile. As of now, major portion of investments (of Insurance companies) flow into Gilts and AAA credit. This means that adequate monies are not made available to entities who are critical to building economic capacity and are deprived of availability of liquidity at affordable cost.
It is time for IRDA to review the investment strategy of Insurance companies to strike good balance between investors interest and economic opportunities. The need is to shift risk profile from conservative (low risk - low reward) to moderate, and make more liquidity available to infrastructure, manufacturing and agriculture sectors. It is essential for Insurance companies to provide leverage to Government investments, which in turn will set up momentum to private sector participation.
Growth visibility will improve if financial regulators turn as facilitation engines
The efforts to build partnership between Government and Regulators is step in the right direction. If all seen together in the same pitch (and right wave length), stakeholders sentiment (and confidence) will step up pace towards the set targets. Signs of "all is well"!
Moses Harding
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