group chaired by jean - pierre landau. bis central bankers ’ speeches increase in risk appetite. it is not far fetched to ask whether excess global liquidity can result. 16 we thus have two broad stories of what kicked off a period of pronounced credit growth and asset price appreciation. first, a fall in the world safe real rate, due to excess savings in the east. second, increasing global liquidity, transmitted through expansive cross - border lending, kicked off by prolonged accommodative monetary policy. these stories are not at all mutually exclusive. 17 and, most probably, both contributed to exuberance. but it is not my purpose this evening to revisit how asset - price appreciations that are initially fundamentally warranted can get out of control through the “ minsky ” mechanisms of extrapolation of past returns into future targets, herding and myopia18 – the last no doubt aided by exaggerated market beliefs of what monetary policy can achieve following years of uninterrupted growth. rather, it is important to my purpose this evening that both stories involve shifts in risk premia driven by changes in the supply and demand for financial assets. shifts in risk premia, gross capital flows, and balance sheet strains that story would hardly have interested most macroeconomists a few years ago. financial asset prices were regarded as providing useful information because they are forward - looking and available at high frequencies, but no more ; they were not seen as actors. indeed, many of today ’ s macro models used in policy making embody an assumption that risk premia are either constant or do not exist ; and that therefore asset prices, and so wealth and the cost of capital, are influenced only by changes in the expected path of the risk - free rate and in the cash flows expected from investments. for anyone who has spent time in markets, that seems at odds with their experience. it is, therefore, of some moment that some recent research has suggested that, for all major asset classes, the principal drivers of fluctuations in asset returns are shifts in risk premia rather than in expected cash flows19 ( ie dividend growth for stocks ; the path of monetary policy rates for low - risk bonds ; default incidence for bonds carrying credit risk ; rental growth for house prices etc ). furthermore, some empirical research now suggests that shifts in risk premia are key factors in macroeconomic fluctuations. 20 this is a big deal. we have seen massive shifts in risk premia over

requirements will largely be met by households and external resources. net dissaving of the public sector has been moderating albeit unevenly ; this sector will remain a net borrower in the economy in view of the critical role envisaged for fiscal policy in shaping india ’ s future. if the nation as a whole has a deficit, it borrows from the rest of the world and the inflow of foreign savings helps finance its investment needs. for india, domestic savings have largely financed the overall investment requirements of growth, with external financing playing a supplemental role as reflected in largely modest current account deficits. as the productive capacity of the economy rises and its ability to absorb foreign resources expands, the volume of external financing and its composition may undergo fundamental shifts, but in the light of past experiences, external debt sustainability will remain a policy priority. given natural endowments, including the workforce and its thrift and productivity, it is the rate of investment that provides the turning points in the economy ’ s growth trajectory as well as its structural shifts. as the economy modernises in the quest of its vision as outlined earlier, market financing will likely grow in depth and sophistication. the institutional architecture of financial intermediation may become more diversified 13 from close to 9 per cent of gdp in 2007 - 08 to under 1 per cent more recently. while exploiting niches of specialisation and leveraging on technological solutions. historically, phases of growth accelerations in india have been accompanied by higher gross domestic investment rates. a key determinant of the desired investment rate, apart from the overall rate of growth, is the efficiency of capital use in terms of the number of units of capital required to produce one unit of gdp. the lower this incremental capital output ratio ( icor ), the higher the productivity of capital or the marginal efficiency of capital. in most developed countries the icor is in the neighbourhood of 3. over the period 2012 - 19, the icor in india averaged 5. 0, but in the last three years, it eased to 4. 0. as these efficiency gains rise, the workforce gathers skills and the economic structure acquires sophistication and technological progress, it is possible to envisage the icor in the range of 3. 5 to 4. accordingly, the required investment over a decade of high growth would be in the range of 33 - 38 per cent of gdp per annum. this is by no means infeasible if the peak