Reserve Bank of India (RBI) Deputy Governor KC Chakrabarty on Monday advised equity investors, both foreign and domestic, to scale down their expectations on returns on capital so as to avoid imbalances that could result in the next round of global financial crisis.
Chakrabarty was speaking on ‘Crisis preparedness in international markets’, at the Jawaharlal Nehru Institute of Development Banking here.
“Sensex cannot give 30 per cent returns on equity every day. There has to be a relationship between debt and equity. Equity has to be higher than debt. But when the overall return on debt comes down, the return on equity also has to come down,” he said.
Stating that the fundamental imbalances related to returns on debt and equity capital still remained unresolved in most of the economies, Chakrabarty said the global economies had to achieve balance between cost of debt and equity.
“If the cost of the debt is coming down, the cost of equity too has to come down. If these basic imbalances were not resolved, it will result in financial instabilities,” he added.
According to him, another fundamental imbalance in global economies that still remained unresolved was productivity and efficiency of capital. “Across economies globally, rich borrows and poor saves. It becomes inefficient when rich borrows while it becomes more efficient and productive when poor borrows,” he said.
Stressing the need to improve the productivity and efficiency of not only the financial system but also real sectors of the economy, the RBI deputy governor said, “This cannot happen unless we change the basic fundamental principle of the economy – where poor borrows and rich saves. When rich borrows, the money is utilised for consumption and speculative purpose.”
Chakrabarty, however, said India was not contributing to such imbalances. Citing the success of the framework evolved by India towards early interventions in the form of preventive corrective measures to address the crisis, he said, “No crisis has happened so we will say it proved to be sufficient.”
The best crisis management framework was one that prevents crises, he added.
