##ed by continued strong growth expected of china, india and the middle east, which would help to mitigate the impact of the softer g3 economies. indeed, inflation has emerged as a bigger concern in asia, particularly among the faster growing economies i have just mentioned, including vietnam. thus, governments and central banks in the region not only have to deal with slower growth prospects, but also guard against rising inflationary pressures arising from strong domestic monetary expansion as well as higher commodity prices. high commodity prices would shape manufacturing decisions and define future trade flows. higher shipping costs from fuel hikes have eroded the wage advantage of low cost producers such as china and vietnam especially in inexpensive items that have high freight cost relative to final sale price. for instance, it has become cheaper to manufacture steel in the us, instead of importing them from china where steelmakers have to transport iron ore from brazil and australia to the mills, and then ship the manufactured steel to the us. china has also recently agreed to pay close to 100 % more for its iron ore. the costs are likely to be passed on to steel buyers and this could fuel inflation. rising commodity prices have also increased the prominence of commodities in the financial markets. commodity markets have in fact, become more financial market like. traditionally, financial activity in commodity markets focused on exploiting arbitrage opportunities, with investors hedging their production or consumption in the futures market. the entry of new market players such as banks and hedge funds, with their different risk appetite and investment horizon, has given rise to varied trading strategies. they have also given birth to a wider variety of financial instruments in the likes of index and exchange traded funds, as well as structured commodity products. these new players also demand the sophistication that they are used to in financial markets. as a result, commodity markets have moved towards electronic trading, high speed communication links and greater efficiency in trade processing. there is also an increasing need for infrastructure such as commodity exchanges and clearing facilities to facilitate trading. while market development is generally welcomed, the risks have to be managed. as commodities become the flavour of the day, market participants should ensure that they understand the risks as they participate more actively in the markets. in their eagerness to ride the commodities wave, banks and other intermediaries should put in place appropriate risk management systems and processes, ensure they have adequate resources including qualified staff, and uphold proper market conduct. investors too, should carefully evaluate complex structures as they seek attractive returns.

have been set up recently. it is our intention to place the reports of the groups on money market, government securities market and forex market in the public domain soon. hence, the subject of the sixth annual conference is both well - timed and significant for us. to justify my presence here, let me take this opportunity to mention some of the recent developments which should be kept in view in the deliberations of the conference. first, under the provisions of the fiscal responsibility and budget management act, 2003, the reserve bank will not be participating, in the normal circumstances, in the primary market for the government securities from the start of 2006 - 07. the technical group that i referred to is currently working on the operational, technological and institutional aspects of this. hence, the market perspectives on the implications of this development can best be articulated in the conference today. second, the twelfth finance commission has made certain recommendations which would mean that the state governments would approach the market instead of obtaining loans from the government of india. several operational and other issues will have to be addressed in the management of the borrowing programme of the state governments, in future. we are convening a conference of the state finance secretaries on 8th april 2005, which will be addressed by dr. c. rangarajan, chairman, economic advisory council to the prime minister and the former chairman, twelfth finance commission, to discuss these issues. the road map that this conference would indicate in this regard will be helpful for our discussions and further policy formulation in regard to debt - papers of the state governments. third, the central government budget has proposed a special purpose vehicle ( spv ) for raising resources for investment in infrastructure. the issuance of debt - paper with relatively longer maturity, outside the government of india ’ s normal borrowing programme, is yet another recent dimension added to the debt - market developments in the country. finally, several legislative changes on the anvil provide new opportunities for further development of fixed income markets. for example, the long awaited government securities bill is at an advanced stage of processing. the finance minister, in his budget speech, announced the intention of the government to bring about amendments to the rbi act and the banking regulation act and the amendments relating to statutory pre - emptions could have implications for fixed income markets. in this context, it is useful to recognise that the stake of the rbi in the fixed income and derivatives market arises on account of several reasons. first, rbi as a monetary authority is most concerned with