INDIA is relatively less exposed to the aftermath of the US sub-prime mortgage collapse crisis that has sent global stock markets into a tizzy. But, it is nevertheless a wake-up call for a number of players who think that markets go only one way, cautions former Chief Economist at the IMF Raghuram G Rajan. Incidentally, Dr Rajan is tipped to head a high-level committee on Indian financial sector reforms.
Dr Rajan said, domestic companies may find it harder to access external commercial borrowings (ECB) though they may not be directly impacted if international investors unwind their equity holdings in listed companies. There could be some re-pricing of Indian assets as well. On the sentiment side, the whole episode may cast a shadow on an overall attitude towards credit and risk-taking.
In the near term, the crisis would, in fact, help the Reserve Bank of India (RBI) tackle the surging rupee. This, in turn, would give a breather to exporters whose rupee earnings have dropped over the last few months, he told ET.
But if the crisis does continue and causes a general economic down turn, India will not remain insulated. The biggest worry then would be of a slow-down in the economy. “Few people realize that Indian growth has accompanied world growth. To that extent, if world growth is lower, it will affect India’s growth. Markets nowadays are so well-connected that things never really remain fully isolated anymore,” he said.
Since last week, Indian bourses have been volatile taking cue from global markets. The US sub-prime mortgage crisis is attributed largely to defaults arising out of loans made to customers with low creditworthiness and history of defaults. Because these mortgages are traded in the markets, it has a spillover effect on banks, hedge funds and institutional investors who participate in it.
Hedge funds, FIIs and other institutional investors, who have put money in mortgage-backed securities in the US, are usually invested in emerging markets as well. These funds off-set the losses suffered due to the sub-prime loan crisis by divesting their portfolio in other markets. To that extent, these investors could suck out liquidity from emerging markets like India and making them vulnerable to the global turmoil.
Dr Rajan’s prescription to investors lies in an age-old adage. “Be diversified and invest for long-term,” he says.