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 Slash your expectations: RBI to investors

AGENCIES

Posted: Monday, Jan 16, 2012 at 1924 hrs IST

Hyderabad: Indian bourses have started to display positive signs, but investors need to scale down expectations of returns on their capital to avoid creating imbalances in the system that will result in financial instability, RBI Deputy Governor K C Chakrabarty said today.

"People who are trying to invest in India, who are investors, they have to scale back their expected return on capital otherwise there will be imbalance and it will create more problems," Chakrabarty told reporters on the sidelines of a function at the Jawaharlal Nehru Institute of Banking and Finance here.

"... Every day the Sensex cannot give a 30 per cent return on equity. There has to be a relationship between debt and equity. But when the overall debt comes down, return on equity has to also come down," he said.

Replying to a query on the liquidity position in the country, the RBI deputy chief said the central bank is happy with the situation.

The apex bank has increased key policy rates 13 times since March, 2010, to tame high inflation.

However, it took a pause on the hawkish monetary stance at its policy review last month as inflation started cooling down.

Chakrabarty refused to answer requires related to inflation and rupee depreciation against the US dollar, saying these will be answered at the RBI's forthcoming monetary policy review on January 24.

The Reserve Bank of India official said there are two fundamental imbalances all over the world that need to be resolved to avoid financial instability.

Explaining the imbalances in the financial system, he said one is the cost of capital and the second is that in any economy, the rich must save and the poor must borrow.

"The second issue is that in any society which has to develop, which has to prosper, it is the rich (that) must save and the poor must borrow. Today, the world-over, economies are such that the rich borrow and poor save. If the rich borrow, it becomes inefficiency. If the poor borrow, it becomes efficient and more productive," he said.

According to him, India does not contribute to any such imbalance.

Earlier, in his speech titled, 'Crisis Management in Interconnected Markets', Chakrabarty said the best crisis management framework is one that prevents crisis and no financial system can be completely immune from episodes of financial instability from time-to-time and there will be a need to manage crises.

"There are important lesson 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," the banking regulator said.

In India, an early intervention system in the form of prompt corrective action based on three indicators – capital to risk weighted assets, non-performing advances and return on assets -- has existed for a long time, he added.

Thanks to Financial Express...