equity markets. looking ahead, low long - term interest rates will feed through into lower returns. it is doubtful that equity prices will continue to advance at the same pace as seen in the past couple of years. the most likely scenario is still one where the fund ’ s real return will approach 3 percent in the longer term. above all we should recognise that future returns on the fund are uncertain. ultimately, returns depend on the pace of growth in the world economy and the share of that growth that accrues as value in the companies and bonds in the fund ’ s investment portfolio. these variables are uncertain. growth in the world economy may come to a halt. governments may default on interest payments. real properties may fall in value when bubbles burst. to achieve returns, we must take on risk. the fund features a very long investment horizon and a sizeable capacity to bear short - term risk. if we can exploit these distinctive features when making investment choices, it should be possible to obtain a return in excess of average market return. shareholders are last in line when company profits are to be distributed. they bear a considerable risk. as compensation, shareholders have received a higher return over time – a risk premium. it is sound investment logic for a fund such as ours to exploit this risk premium to boost returns, which is why the chosen allocation to equities is relatively high. in addition, a reasonable distribution between bonds and equities can contribute to reducing the fund ’ s overall risk, as bond and equity prices tend to move inversely. the bond portfolio may thus be seen as a kind of hedge against a drop in equity prices. in recent years, the fund has also invested directly in real estate. in the light of its size and long horizon, the fund is well poised to make gains in low liquidity markets. real estate investment is an example. the mandate provides for an increase in the real estate allocation up to 5 percent, while the allocation to fixed - income instruments is to be reduced from 40 percent to 35 percent. bis central bankers ’ speeches a few years from now, almost two - thirds of the fund will thus be invested in real assets. this is a fairly high share. a pertinent question may still be whether as much as a third of the fund should be invested in low - yielding instruments. it takes time to build up a real estate portfolio. as we gain experience in real estate investing, it may be natural to invest in other types of real assets

risks arising out of unhedged foreign currency exposure of the corporates and price them in the credit risk premium while extending fund based and non - fund based credit facilities to them. banks have also been advised to consider stipulating a limit on unhedged position of corporates on the basis of policy approved by the board of the banks. the above measures need to be strengthened by requiring the corporates to put in place a risk management policy for their unhedged forex exposures. we have observed that despite our repeated efforts to sensitize both banks and corporates on the matter, adequate measures have not been put in place. it was therefore decided to increase the risk weights and provisioning requirements on banks ’ exposures to corporates on account of the corporates ’ unhedged forex exposure positions. 24. another related issue that banks and corporates have discussed with us is the nonavailability of long - term hedging products to the corporates. while otc forward market is liquid enough up to one year, the exchange traded market, which i would come back to, is liquid only in the near month segment. if the interest rate parity holds good, forward rate should reflect the interest rate differentials. otherwise, it becomes more a function of demand and supply. while there has been no regulatory restriction on booking of long - term forwards beyond one year, market participants generally prefer booking short - term contracts ( maximum tenor up to one year ) and then roll it over till the maturity of the exposure. this strategy partially addresses their long term risk, substituting the exchange rate risk with the less volatile forward premium. inter - bank market also uses mifor curve which is the implied rupee curve for pricing long - term forwards. a long - term forward contract requires taking a view of long - term interest rates in both domestic currency as well as foreign currency. while in case of us dollar, the inter - bank term rates are available through active swap market, the term money or the term swap market for tenor beyond one year is not liquid enough in india, thus, making it difficult for the market to price the forwards beyond one year. the interest rate swap market, which is quite active up to five year, is predominantly an overnight indexed swap market with floating leg linked to the overnight uncollateralised inter - bank call rates rather than inter - bank term rates. how can this problem be addressed? an important prerequisite would perhaps be a