FM brings home reforms message

Interest rates will not rise; Markets will be strengthened; Investment drought over.

Finance Minister Palaniappan Chidambaram made a series of significant announcements in private today: he told captains of industry that interest rates would not move up; he told representatives of foreign institutional investors (FIIs) that the government would be willing to review the capital gains tax regime for them; and he said the government would consider allowing pension funds to invest in open-ended equity funds.

These, of course, topped an assurance to brokers last evening on the coming Budget. The finance minister promised that the government would take many initiatives.

"He said we should expect a few 'sexy' things in the Budget," a broker told Business Standard. Today, Chidambaram said the Budget would be presented in the first week of July, and that its date would be announced after consultations with Parliamentary Affairs Minister Ghulam Nabi Azad and the new Speaker of the Lok Sabha.

He also told Indian financial institutions today to continue strengthening the market on a commercial basis. He contended that the investment climate had already perked up.

Banks had achieved financial closure for six power projects with a combined capacity of 3,700 MW in the last 10 weeks "" and 10 more with a total capacity of 6,867 MW were in the pipeline.

"After a prolonged investment drought, I can now see investment picking up. Bankers and industrialists have told me that a rush of investment is coming over the next 10 months," said the finance minister, who is self-styled the 'minister for investment'.

"My job is to promote investment," he added, saying that the United Progressive Alliance government would step up investment in manufacturing and agriculture.

Over an elaborate lunch today with industrialists at Mumbai's Taj Mahal hotel, Chidambaram laid to rest all speculation that interest rates would move up.

He categorically stated that the high interest rate regime would not return. Until international interest rates move up to India's level, the central bank would not increase rates, he assured corporate heavyweights.

The corporate world had been apprehensive of interest rates rising, something that would impact their bottomline.

The assurance on interest rates came on the heels of an early morning, closed-door meeting Chidambaram had with Reserve Bank of India (RBI) Governor YV Reddy, at which the finance minister was briefed on the interest rate and exchange rate outlook.

Chidambaram asked the RBI to further simplify procedures for the flow of credit to agriculture, to reorganise regional rural banks and enlarge the role of the National Bank for Agricultural and Rural Development (NABARD), and strengthen the supervision of banks.

At a meeting with the heads of the Life Insurance Corporation of India (LIC), the General Insurance Corporation of India (GIC) and the Unit Trust of India, the finance minister expressed his satisfaction over the manner in which FIs have helped strengthen the capital market on their own accord.

Chidambaram asked the FIs to continue strengthening the market on a commercial basis, said GIC chairman PC Ghosh. The GIC chairman clarified that the government was not giving directives to them to prop up the market.

At least one of today's meetings seems to have borne some fruit. Dominic Price, managing director and senior country officer, India and Sri Lanka, JP Morgan Chase Bank, described the meeting with FIIs as "very impressive and encouraging".

At the meeting, a long discussion on participatory notes and their possible misuse took place, with the central point being whether the volatility in the markets could have been caused by such misuse. Several participants noted that the recent volatility was a global phenomenon.

Uday Kotak, vice-chairman and managing director of Kotak Mahindra Bank, said the finance minister "reassured the financial community and sent out the right signals. Basically, the message was that we are seeing a mature and responsible government."

On Wednesday, the finance minister reiterated the importance of a strong capital market. Chidambaram said he proposed to form a special committee in the next few days to advise him on the capital market.

Chidambaram also assured bankers on Wednesday that there would be no question of directed lending to agriculture by banks.

"We do not wish to interfere in the pricing and risk adjustment exercise of banks for agri-lending," he said, trying to allay bankers' apprehensions on possible increase in non-performing assets.

Rather, he advised bankers to look upon this segment as a commercial opportunity, stating that there are 100 million farming families of which only 40 million receive institutional credit.

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The policy push

• Budget to be presented in the first week of July.
• Govt will review capital gains tax regime for FIIs.
• Pension funds may be allowed to invest in open-ended equity funds.
• Centre to step up investment in manufacturing, agriculture.
• RBI asked to simplify procedures for credit flow to agriculture.