Interest rates hurting stock market culture in India: Experts

Feb 11 2013, 12:54 IST
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SummaryA high interest rate environment makes people relatively relaxed, complacent: Citi

A high interest rate scenario wherein people can get almost 10 per cent returns on low-risk products like fixed deposits is coming in way of a diverse stock market culture getting developed in India, experts say.

"One of the reasons for equity culture not developing to desired levels is the high interest rate scenario in the country. A high interest rate environment makes people relatively relaxed and complacent, when it comes to making investments," global banking giant Citigroup's Head of Markets (South Asia) Pankaj Vaish said.

"For most households, it is attractive to park the money in a bank account and other deposits for almost 10 per cent returns with virtually zero risk, as against risking their money with equity even if the returns could be higher," he said.

Vaish, who was here for an event organised by Citi in partnership with Cambridge-based renowned business school MIT Sloan School of Management, said it will take some time and investor education for the people to get comfortable with the equity culture.

"It is a competitive marketplace, when you see the equity market pitched against corporate bonds providing interest at around 10 per cent, by some of the big names in the public and private sectors.

"Our culture is such that people are more comfortable ensuring the security for their investments, rather than merely looking for high returns. Hopefully the next generation would have the appetite to take greater calculated risks," Vaish added.

Asked about India's growth potential on the global stage, Vaish said that there was a time when people here were satisfied with a three per cent growth rate, but the times have changed and the aspirations are high today.

"This is something we need to be cognizant and careful about in a democracy. At times we blame the slowness in the economy on our democracy, but it is the democratic systems and institutions which ensure that the aspirations of our citizens are met.

"If the aspirations are not fulfilled and we do not provide the opportunities to our youth, then not only is it an unused asset but the accumulated unfilled aspirations can be a huge debt that we will have to service," he said.

Asked about the issues before Indian economy, MIT Sloan School of Management's Deputy Dean S P Kothari said leaders of the country need to introspect why India is given low rankings on various economic parameters by the agencies like the World Bank and UN.

"We should understand that they are not conspiring against India and if you see there is actually a good amount of goodwill out there for India. There is a lot that is going on in favour of India, but at the same time we need to understand that we need to change. We have to change quite dramatically," Kothari said.

Asked whether the delays caused by democratic processes are coming in way of India's growth on global stage, Kothari said that many countries have got democracies but they do not necessarily come in the way of conducting business.

"For example the stalemate in the US Congress is not allowed to hurt the US economy... India needs to show what are the measures that would convince the world that the problems are no longer there," he said.

Kothari said that if India manages to take its FDI inflows to the level of USD 250 billion a year, it would roughly translate into an improvement in the GDP growth rate by about 2-3 per cent.

"Therefore if we want 9-10 per cent growth rate, this USD 250 billion FDI would get us there," he said.

Asked about the steps that are required to achieve these goals, Kothari said: "It is not a continuity and consistency in the framework that would be required for these numbers, but a lot of improvement from the current policies would be needed to achieve these targets.

"We would need to experiment a lot more. The law enforcement is a major issue. Businesses need an effective law enforcement mechanism, be it for their labour dispute, patent dispute or any other issues, they want speedy resolutions.

"Especially, when it comes to international operations, no one wants to take risk and when they go for arbitration, they either go to Singapore or London. This is despite India being a nation full of lawyers and the country also doing lots of back-office legal work for the rest of the world," he said.

"It has to be a single minded pursuit to get the output, it cannot be done just by talking about streamlining the things," he said, while adding that India today competes with over a hundred countries and it has to make it attractive for the rest of the world to come here.

"Its not only about companies and investments, We would also need to make our IITs and IIMs much more attractive for students from outside the country to come here to study. We need to make the country attractive enough for both the financial capital and human capital to come here," he added.

Kothari also said that India needs to encourage the domestic investors for sectors where they are interested, and allow the foreign investors in the areas of their interest.

"It should not be the case that we dictate the terms with regard to which investor would be allowed in which sectors.

"We can channel our domestic investors into areas like infrastructure and let the foreigners come into other areas where they want to come. We need both the domestic and foreign investors," he said.

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