News: Indian PM says more financial reforms needed

(RTR 06/10/2006) Mumbai - Prime Minister Manmohan Singh said on Friday that further reform of the financial sector was necessary to attract investment and create more efficient markets so that double-digit economic growth can be achieved.

"If we have to achieve our growth ambitions of 8-10 percent per annum we need investments of a high order," Singh said in a speech at the opening of the new headquarters of the Securities and Exchange Board of India, the capital market regulator.

"These would be possible only by making our financial markets more efficient, more competitive and more global."

India's financial sector is relatively closed to foreign investors. A foreign investor is not allowed to hold more than 5 percent in a private sector bank or more than 26 percent in a local insurance venture.

While foreigners are allowed to freely enter and exit India's stock market, they cannot hold more than $1.5 billion in corporate bonds and $2 billion in federal bonds.

The local bond market is dominated by domestic banks. The market is considered fairly undeveloped due to a lack of sophisticated hedging tools, and investors have to cover any short positions before the close of trade.

"The bulk of capital markets in advanced nations are in debt securities. However, in our experience the debt markets in India have not quite delivered on expectations," Singh said.

"We need to make efforts to understand why the debt market has not taken off, and to take policy measures to make it deeper, broader and more liquid. While regulations may help in this direction to some extent, we need to reform our financial sector further if we are to have a larger debt market."