Twin deficits — Current Account Deficit (CAD) and Fiscal Deficit (FD) — continue to pose a threat to the rapid recovery of the economy to a high growth trajectory unless contained at the earliest, and the Finance Minister appears to have made an earnest attempt to resolve them.
“The expected easing in CAD situation in response to the reform measures will reduce the burden on foreign exchange reserves, and will arrest the rupee depreciation,” said R. M. Malla, Chairman and Managing Director of IDBI Bank.
According to him, the measures announced in the Budget towards narrowing CAD include calibration of the foreign investment definition , simplification of procedures for FIIs investment, permission for foreign investment in currency derivatives and dedicated debt exchange.
“These will help FIIs participate in a broad manner in the financial market,” said Soumya Ghosh, Independent Economist. FIIs can use their huge investments in corporate bonds and government securities to hedge the risks.
Acknowledging the role of FII, FDI and ECB inflows to bridge the current account deficit shows the finance ministers practical ápproach, said R. Venkataraman, Managing Director, India Infoline Ltd (IIFL).
The funds brought by FIIs are crucial for the Indian markets.
Earlier, the FIIs had to go through the banks to cover their foreign exchange exposures. While these measures would broaden the market, especially the exchange-traded derivatives, they would also bring in more liquidity to the markets.
“When FIIs hedge their position, the cost of capital reduces. They need not put extra funds to maintain their hedge position. Further, they are able to mitigate currency risk on their portfolio by hedging currency risk. Overall they will be able to take position on a company’s future prospects without worried on currency volatility,” said Dinesh Thakkar, Chairman and Managing Director Angel Broking.
Trading in debt segment
“The budget proposal to allow Insurance and Pension companies to directly trade in debt segment is a welcome move. This will allow institutional participation in the exchange traded bond market,” said Rajesh Sud, CEO and Managing Director, Max Life Insurance Co. Ltd.
The Finance Minister's assurance that Insurance Amendment, and PFRDA Bills would be presented in this session, and the proposal to set up Standing Council of experts for reforms in the financial sector to compete internationally, showed his commitment towards the financial services sector, he added.
“The Indian debt market is under-developed to a great extent, and the current budget has announced measures to increase the depth of the market by introducing a dedicated debt segment on the stock exchange,” said Manoj K. Kashyap, leader financial services, PwC India.
Insurance companies, provident fund and pension fund companies would directly gain access to this segment with the approval of the sectoral regulator. In addition, distributors of mutual fund companies would also be able to access the stock exchange by becoming members of the mutual fund segment. “These measures will help increase participation and widen the capital market,” Mr. Kashyap added.
“The Finance Minister has walked the tight rope, attempting to reassure the foreign investor by making the process of investment more transparent and uncomplicated, and, at the same time, encourage the domestic retail investor to invest more in financial assets,” said Robin Roy, Director, Financial Services, PwC India.
The Finance Minister further announced that banks could now act as brokers to sell life insurance policies. “While this will offer a wider array of products to the customer, there is a need to evaluate this on level of market maturity and regulatory evolvements,” said Mr. Sud.
KYC requirements for the retail investor were being made common if one wanted to open a bank account and invest in insurance. KYC of banks being sufficient to acquire insurance policies was also an important step in the direction of financial inclusion as it had the potential to reduce paper work if a repository of bank KYC could be created with access to life insurance companies.
First time, investors in RGESS would have a tax relief for their investments for 3 years.” It will certainly attract more investors in equity market/mutual funds. Introduction of Inflation Index Bonds and additional relief on Housing loan will attract small tax payers”, said Nilesh Sathe, Director and CEO, LIC Nomura Mutual Fund.
FIIs can use their huge investments in corporate bonds and government securities to hedge the risks