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Economy rises: More reforms needed to accelerate growth

Reserve Bank of India Governor Raghuram Rajan commented that  India’s economy may be on course for revival with stalled projects moving again.

Country needed growth to accelerate to 8-10% from 6-8% levels in order to pull the country’s most disadvantaged sections out of poverty.

RBI plans to review the limit on overseas ownership of Indian bonds twice a year, opening up the possibility of an increase. With the cap close to being reached, that’s something global investors are keen on due to the high returns on Indian paper relative to other markets.

The central bank has been watching the progress of the June-September monsoon, which will have a strong impact on prices.

“Inflation is always a matter of concern,”

He also referred to varying monsoon forecasts making things difficult to call. The India Meteorological Department expects the rain to taper off while non-state forecaster Skymet expects the trend of a strong monsoon to persist.

“Forecasting is a difficult job and it’s a little noisy at this point,”

“We have broadly decided to look at limits twice a year and we just have to fix the date,”

Overseas ownership of Indian fixed-income securities has been tightly controlled because of fears that bad news could lead to high volatility as foreigners exit in panic.

“RBI wants to put up a structured mechanism instead of (a decision on an) ad-hoc basis,”

Overseas investors have nearly exhausted their $30-billion limit on government bond ownership imposed two years ago. They own $39.27 billion of corporate bonds, 77% of the limit of $51 billion.

Indian government bonds yield more than 7.8%, compared with about 2.5% for US treasuries and less than 1% for German Bunds.

Many countries such as Sweden and Switzerland are pushing negative interest rates.”Although Indian government bonds are not included in most widely followed local-currency benchmarks due to significant access restrictions (ie,domestic registration, custody rules, and auctions of investment limits, global investor interest has been significant,.

With inflation more than halving in the past two years and an improvement in macro-economic indicators, investors expect that interest rates could be headed lower as well, leading to capital appreciation. But the governor made clear that any increase would be carefully calibrated so that dependence on overseas money is limited.

To avoid damage to the currency, the central bank is in the process of permitting companies to sell rupee-denominated bonds to international investors where principal and interest payments will be in the Indian currency, with investors bearing the exchange rate risk.

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