'Hedge funds are risk to markets'
After sounding a cautionary note on possible signs of overheating in economy, in his credit policy earlier this week, RBI governor YV Reddy on Friday has put hedge funds under scanner as a source of potential risk to financial markets.
By TNN |
NEW DELHI: After sounding a cautionary note on possible signs of overheating in economy, in his credit policy earlier this week, RBI governor YV Reddy on Friday has put hedge funds under scanner as a source of potential risk to financial markets.
Since the source of hedge funds is difficult to be determined, the risks are diffused, he said at a ASSOCHAM conference on Global Risks to Emerging Markets. “Lack of transparency in accounting and disclosure make hedge funds a source of potential risk,” Mr Reddy said. Citing the recent controversies relating to hedge funds in the US,
he said that they ought to be looked at carefully.
Presently, these funds are invested in India through offshore derivative instruments called participatory notes (PNs), which are not registered foreign institutional investors (FIIs).
While the global banking system is adequately insulated from such risks, pension funds and insurance companies could be more prone given the fact that they are not as rigorously regulated as banks, he said.
But the Indian banking sector, according to the RBI governor, is relatively resilient to any possible risks as compared to other emerging economies. Mr Reddy said most central banks in the world agree that risks globally are under-priced. “It could be on account of high net worth individuals or could also be many other sources,” he said.
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About global financial markets, he said there has been a re-pricing of risks in the aftermath of a sharp decline in several asset markets during May-June, including emerging market economies. There has been a resilient recovery in the global equity markets. Of late, investor optimism seems to have returned to most equity markets across the world, more significantly to the emerging markets, he said.
He further added, credit markets spreads, emerging markets and corporate debts which had widened in May-June, narrowed to all-time lows in September following sovereign rating upgrades.
The RBI governor also said that India and China were the only countries among the emerging market economies with an investment rate of more than 30% of their gross domestic product. However, China has a higher saving rate of above 40% as compared to India where it is in the range of 20-30%, he said. While Indian economy is driven by domestic demands, China is largely driven by external demands.
Responding to a query on RBI’s policy on gold, he said that policy intervention in gold imports could not be wished away as the precious metal was seen as a surrogate for currency.
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