India is approaching a consistent economic growth rate of more than 9 %, central bank Deputy Governor Rakesh Mohan said on Saturday.
“Our aspirations have taken an upward turn towards sustained growth of over 9 % gross domestic product,” the Reserve Bank of India’s Mohan said in an address in the northern town of Agra, Uttar Pradesh. “We should be a $1 trillion economy in 2007-08.”
India’s $854 billion economy, the fourth-biggest in Asia, may expand at a record 9.2 % in the year ending 31March, following a 9 % gain last year, the government has said. The growth rate in the past three fiscal years has averaged about 8 %.
The government wants to boost growth to increase jobs and raise incomes among its 1.1 billion people, half of whom live on less than $2 a day, according to the World Bank.
India’s bond market has a “way to go,” Mohan said. The development of the Indian bond market, which is still “far from global standards,” is crucial to monetary policy.
The slow development of the corporate bond market, which is of concern, needs to be speeded up, Mohan said.
The evolving bond market has led to a “liquid yield curve that has developed reasonably well,” Mohan said. While the importance of financial “intervention” continues, building efficient financial systems is key, the deputy governor said.
The central bank has adapted smoothly to changes that have arisen from the fiscal prudence law, Mohan said. India has in the past maintained financial stability amid high fiscal deficits, Mohan said. India’s combined federal and state fiscal deficit of 6 % was “still high,” relative to global standards, he said.
The bond holdings of Indian banks have fallen as credit growth has risen.
“Commercial banks’ statutory liquidity ratio bond holdings have declined to about 27% from 40% four years ago,” Mohan said. “The Reserve Bank does have the flexibility to reduce the ratio to below the 25% limit should monetary conditions dictate us to do that. We can go in both directions.”
India needs more interest-rate stability and developed finance markets will help bring this about, Mohan said.
Forward premiums were more related now to the 91-day treasury bill yield, the deputy governor said.
“We do find much better correspondence in the 91-day treasury bills and the dollar forward premiums,” Mohan said. “The market development has led to some convergence among market segments. We need to work on it further to integrate it with the world market.”
The movement of 91-day and 10-year bond yields are relatively consistent, he said.
The central bank has improved bond market liquidity from earlier, Mohan said. Still, the difference between bid, ask prices of bonds needs to decline, he said.
“The bid-ask ratio in bonds has come down to a 1 basis point difference,” he said. A basis point is 0.01 percentage point. “But it needs to come down to one-10th of that if we are to come close to international standards.”
India’s repurchase and reverse repurchase rates are key monetary policy instruments, Mohan said. The two rates have been used by the central bank in the past year and a half to signal changes in monetary policy.
Increasing capital flows are leading to complexity in monetary management, Mohan said. India needs to build a certain degree of absorptive power for capital flows, Mohan said.
The amendments to the Reserve Bank of India Act gives it flexibility over monetary policy, Mohan said. India needs to work on the diversity of policy instruments available. While India’s bond yields are relatively responsive to policy changes, diversity of bonds is not wide, he said.