RBI deputy governor for investors to scale back expected returns

January 16th, 2012 - 7:24 pm ICT by IANS  

Hyderabad, Jan 16 (IANS) Reserve Bank of India Deputy Governor K.C. Chakrabarty Monday said investors, both foreign and Indian, should scale back their expected returns on capital.

Talking to reporters on the sidelines of an event here, he said while India is not contributing to global systemic imbalances, the investors should scale back their expected returns.

“There has to be a relationship between debt and equity. Equity has to be higher than debt but when overall debt return comes down, return on equity also has to come down,” he averred.

The deputy governor said if cost of debt is coming down, cost of equity has also to come down, otherwise this will lead to financial instability.

He felt that in any society which has to develop and prosper the rich must save and the poor must borrow. “Today world economy has become such that rich borrows and poor saves. What happens when rich borrows it become inefficient and when poor borrows it become more efficient and productive. Unless you do that productivity and efficiency can’t come up.”

Earlier, speaking on ‘crisis preparedness in interconnected markets’ at Jawaharlal Nehru Institute of Banking and Finance, he said the crisis occurs when greed takes over need.

“When greed takes over need and a group of mischievous elements are able to hold the good to ransom, the seeds of a crisis are sown,” he said.

Chakrabarty said financial crisis would continue to occur again and again if two imbalances were not addressed.

“The first issue is the cost of capital. How come if globally the returns on debt are coming down, but nobody is ready to accept lower return on equity. Unless this basic imbalance is solved, this will sow the seeds of next crisis,” he said

He felt recovering from crisis is not possible without real increase in the productivity and efficiency of the real sectors of economy and for this there is need to have basic fundamental principle of economy where poor borrows and rich saves.

The central bank official opined that the best crisis management framework is one that prevents crisis. He, however, said no financial system can be completely immune from episodes of financial instability from time to time and there will be a need to manage the crisis.

He said the central bankers and regulators have to remain prepared to manage crisis.

“There are important lessons to be learnt from each crisis. Yet we can count on each crisis to be sufficiently different from every other crisis so as to make their identification a challenge. We can but be alert and flexible to evolving risks.”

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