Rakesh Mohan sees bigger role for PDs

Asian countries should step up their initiatives towards setting up the Asian Bond Fund and evolve innovative instruments to facilitate cost-effective fund raising for these countries within the Asian region, said Rakesh Mohan, deputy governor, Reserve Bank of India, at the inaugural address in the annual meeting of Fixed Income and Money Market Dealers' Association of India (FIMMDA) on Tuesday.

There is a greater need for financial integration of the Asian countries to match the pace of intra-regional trade among these countries, he said. It is estimated that the regional nations account for almost 50 per cent of the total trade of the Asian countries.

This also assumes significance as the members of FIMMDA will also be meeting in Singapore as part of the annual meeting. The RBI deputy governor also highlighted the need for deepening the bond market so as to improve the liquidity in the market. The shallowness is leading to greater fluctuations in the government securities yield.

Substantiating the point, he said the yield on the 10-year paper had touched 4.5 per cent in October 2003, when the market was flush with funds. Tight money conditions have led to firming up of the yield to 7.4 per cent, currently. And this is mainly due to the dearth of hedging instruments in the market.

Nevertheless, the domestic debt market, he said, has traversed a long way and is currently is at crossroads with significant changes expected with the advent of the Fiscal Responsibility and Budget Management (FRBM) regime.

Effective from April 1, 2006, the central bank will cease to be a party in the primary issuance of government securities as part of the government borrowing programme. Mohan, therefore, envisages a greater role for primary dealers under the FRBM regime as a market maker in the primary issuance of gilts under the government borrowing programme.

In this context, the RBI is actively considering a proposal to allow 100 per cent underwriting by primary dealers in the government borrowing programme. This means if a government security fails to get sold in the primary auction in raising money for the government, primary dealers could subscribe to the full amount and then offload it in the market depending on favourable market conditions.

Greater depth in the bond market will also help sub-sovereign entities like municipal and local bodies raise money from the debt market without depending on the state government funding.

In future, even the state government will depend more on the market for raising funds. While this could improve the supply of instruments across risk categories in the debt market, a greater demand could be generated by encouraging new class of investors like non-government organisations, pension funds, insurance companies, provident fund trusts and cooperative banks.

On the macroeconomic scenario, Mohan said, the inflation will end the financial year, on March 31, 2006, at 5-5.5 per cent, and the economy is expected to grow at 8.1 per cent in 2005-06.