Former Reserve Bank of India governor Bimal Jalan, who is now a member of the Rajya Sabha, the upper house of Parliament, and is also a member of the parliamentary consultative committee of the ministry of finance, has long been apprehensive of the bull run on the Indian stock market led by external funds. In fact, he preferred to call it a “bubble”. A day after the meltdown, he spoke to Mint on a range of issues, including the macroeconomic fallout of a US credit market crisis, and argued for a level playing field between domestic and foreign institutional investors. Edited excerpts:
How do you expect the US credit market crisis, which is now manifest in the stock market slump here, to pan out?
This (the stock market drop) is a purely financial phenomenon. It was expected because it is a bubble. It would have been better if it had happened slowly, but this won’t affect any real activity in the economy, unless there’s a crash.
Won’t it affect the money market?
Liquidity is sufficient, that’s not a problem. Bubbles like these, financial bubbles in particular, suffer from what Keynes called the casino effect: People just continue to pour in money, even by borrowing. At the moment, this cycle is correcting itself. Anything which goes up, at current prices, by 40% is a financial bubble. That’s what has been happening in the stock market, you had 30-60% returns on average. Look at the Reliance Power IPO. Thousands and thousands of crores being bid, even without (the company generating)a single unit of power. All this, even as the market was going to fall. So there could be a shock effect, but not much on the real economy.
Economic confidence: Bimal Jalan does not think a recession in the US would affect India much. (Photo: Ramesh Pathania/Mint)
The second thing is the US impact. The most interesting thing about market economics is that whatever happens, the market will find a reason to explain that. Just three months ago, we heard that Asia—namely India and China—had decoupled (from the US economy), they are the primary sources of growth for the global economy. Now, suddenly, we are coupled. So, one is the impact on the financial economy. One doesn’t yet know the full impact, and how deep the recession might be. But if there is a recession, FIIs will start withdrawing money, (so would) even banks which have been hit. The second is the contagion effect. This may start affecting other countries. Europe is already badly affected. But looking at overall trends so far, I don’t see that affecting us much.
Also, inflation is under control, so the liquidity problem becomes that much more easy to handle.
But there is a considerable inflation at the retail level.? Also, global commodity prices are very high.