ANNUAL REPORT 2007-08
Several measures were also initiated to develop the private corporate debt market. The Union Budget 2007-08 has announced measures to develop bond, currency and derivatives market including launching of exchange traded currency and interest rate features and developing a transparent credit derivatives market with appropriate safeguards. Government Securities Regulations 2007 has come into force with effect from December 1, 2007. All the above measures undertaken by the various regulators will open opportunities for the insurance companies to park their funds in a profitable way. However, they may have to improve their skills in dealing with
such complex exotic financial instruments.
The CSO has placed the real GDP growth originating in Agriculture, Industry and services during the first quarter of 2008-09 at 3.0 per cent, 5.2 per cent and 10.2 per cent respectively. Accordingly, the real GDP growth in the economy
worked out 7.9 per cent for the first quarter as against 9.2 per cent recorded in the first quarter of the previous year. Inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, increased to 11.4 per cent as on October 4, 2008 from 7.8 per cent as at end-March 2008 and 3.2 per cent a year ago. At a disaggregated level, prices of primary articles and manufactured products rose by 12.7 per cent and 9.7 per cent, respectively, as compared with 5.0 per cent and 4.5 per cent a year ago. Inflation, based on the consumer price index (CPI) for industrial workers, showed a sharp increase to 9.0 per cent on a year-on-year basis in August 2008 from 7.3 per cent a year ago.
The interest rates (both deposit and lending rates) rose significantly during the first two quarters of 2008-09. Deposit rates offered by the banks for various maturities increased by 50-175 basis points and the benchmark prime lending rates of Public Sector Banks increased by 125-150 basis points during the same period.
The weighted average yield of Central Government securities were higher at 8.81 per cent as compared with 8.12 per cent. The yields on Government securities with one-year residual maturity increased from 7.49 per cent at end-March 2008 to a high of 9.25 per cent. The overnight rates in the call market, market repo (outside the LAF) and collateralised borrowing and lending obligation (CBLO) hardened across the spectrum
on account of tighter liquidity consequent upon gradual increases in the CRR during April-August 2008. The weighted average discount rate of Certificates of Deposit increased from 10.00 per cent at the end of March 2008 to 11.56 per cent by end-September 2008.
The outlook for the emerging economies remains positive, but uncertainties about their resilience to the global shocks have increased. Industrial production and export volumes have slowed down. While equity markets have fallen sharply in tandem with those in advanced economies, bond spreads have widened. The international financial system is gripped by extreme risk aversion in the wake of spectacular failures of among the world’s largest financial institutions.
With buoyancy in stock markets, while investors are willing to take risks and prepared to bear investment risks by opting for ULIPs, with the financial crises across the globe and melt down in the stock markets, the sentiments of the investors may turn the other way and many would like to invest their surpluses in safe and traditional financial instruments rather than take risks. As such, the preference will be shifted away from ULIPs and life insurers may have to design traditional products with good incentives. As such, the growth in life insurance business in near future may not be as robust as it was so far. Further, as insurance companies are closely monitored by their solvency margins, they have to inject additional capital to maintain the regulatory requirement. Under the present position in the financial markets, it is difficult to raise funds from the capital markets and promoters may find it difficult even to divest their own investments in a bearish stock market.
In the recent past, insurance companies have gone aggressively on branch expansion and added technical manpower. The associated costs due to those are high and companies may find it difficult to sustain with high costs and low premiums. With slow down in the economic growth, the personal disposable incomes will be lower thus affecting the savings and investment. The slow down in the industry, and lower investments in the private corporate sector leads to lower asset formation. This together with lower merchandise trade affects the non-life insurance market. With slump in the stock markets, the investment income for the non-life insurance