Jaitley pitches for a deeper bond market
MUMBAI: Union finance minister Arun Jaitley on Tuesday said India needs a “deeper” bond market, and said it is a priority area for the government, which is keen to strengthen the corporate bond market as an alternative to borrowing from banks.
“Banks’ resources are constrained by the slowdown in certain sectors, which has impacted the health of the banks themselves. So, one of the area India looks forward to is to deepen the bond market,” Jaitley said in his valedictory session at a CIIBRICS event on corporate bonds.
Corporate bonds are issued by companies to borrow money from people in return for a fixed interest. Deepening of the market would imply allowing entry to multiple players in issuing and repurchasing the bonds, which is till now limited to a few entities.
The Reserve Bank of India recently said it is looking at allowing brokers to repurchase bonds and permit foreign investors to directly trade them. “The government has accepted most of the recommendations (of the HR Khan committee),” said Jaitley. “I feel these should be implemented in the next 6-8 months.”
Earlier, Sebi chairman UK Sinha called for easier taxation for corporate bonds. “Taxation on income from bond market is rather high and that will be an issue,” Sinha said, who added that the regulator will formulate norms for algorithmic trading in consultation with the RBI and the government. Inthiscase,doveandhawkderive theirreferencefromthebasicmandate of monetary policy — of aiming for price stability, maximum employment and moderate longterm interest rates.
This mandate is followed by most central banks around the world,thoughitmaybespeltoutin Price stability means low and stable inflation. In the short-term it is related to growth through the amountofmoneythatispresentin the economy.
Pricesfallwhenthedemandofa product is lower than its supply. This leads to lower revenues for companies, which in turn invest less in production so that the supply can fall to a level where prices canriseagain.Sinceproductionis declining, the growth of the economy – calculated as change in the Janet Yellen Mario Draghi total value goods sold – falls.
Meanwhile, prices rise when demand outstrips supply. In this casecompaniesareincentivisedto raise production. Higher production leads to higher employment, which leads to higher demand for goods, and thus, more growth. H Kuroda Mark Carney Peopleandcompaniesneedmoney in order to buy goods and make investments. This money is supplied by banks, which in turn borrow from the RBI.
The RBI lends short-term (for a period of less than 15 days) money UrjitPatelhasbeentermedahawk because he was instrumental in puttinginplaceinflationtargeting at RBI. But recently, he advocated the use of the 2% band above and belowthe4%targettomeetgrowth objectives.
Thisisadeparturefromhisearlier days as RBI deputy governor, whenhehadanunyieldingstance on price stability.
In his meeting with economists lastweek,Pateldownplayedinflation risks and a possible GST impactonprices,andstressedthat growth is the focus of RBI. That verily makes him a dove.
Butaclearlabellingwouldtake time.Patelisyettopresenthisfirst monetarypolicy,whichwillalsobe the first for the Monetary Policy Committee (MPC).
In the US, the Federal Reserve OpenMarketCommittee(FOMC), the country’s equivalent of the MPC, routinely publishes its minutes, so labelling members on the basis of policy action, rather than their views, is relatively simple.
As economist and US Fed officialWilliamPoole(aself-confessed hawk) said, “When you get to an FOMCmeeting,youhavetousethe best information. You need to be ready to change your mind.”