Mumbai: The US subprime crisis has led to a welcome tempering of investor exuberance in India, and has also helped quell worries the economy could overheat, former Reserve Bank of India (RBI) governor Bimal Jalan said.
Jalan, whose 1997-2003 tenure as head of the central bank included the Asian financial crisis of 1997/98, said huge capital inflows into India could complicate currency and liquidity management, and the economy has to be shielded from sudden large moves in the exchange rate.
“Overheating concerns in the economy, paradoxically thanks to the subprime crisis, have quietened and, in fact, cooled substantially to a very large extent,” Jalan said in an interview on Thursday. “I see the markets getting more cautious due to the effects of the subprime crisis. In my opinion, that is a good thing. Some moderation in investor exuberance is necessary.”
The Indian stock market hit a record high in July, before falling 13% as subprime fears roiled global markets.
It has recovered strongly, rising on nine out of the last 10 days, to close on Thursday just 1.6% below its record high.
Jalan said Indian banks had very limited exposure to foreign loans, which would limit the direct impact of the subprime mortgage sector troubles.
IDBI Capital Market Services Ltd said in a report that data indicated India’s exposure to US mortgage markets was less than $500,000 (Rs2 crore).
Jalan, now a member of Rajya Sabha, expected the economy to stay strong, but said global market turmoil or political instability were risks.
“I think we are in good shape and growth is likely to remain high, irrespective of the actual numbers,” he said.
The economy grew 9.4% in 2006-07 (April/March)—its fastest rate in 18 years, and RBI expects it to grow 8.5% in the fiscal year ending in March 2008. Attracted by the strong growth and a booming stock market, foreigners have been increasing their investments in India. Those capital inflows helped drive the rupee to a nine-year high of 40.20 per dollar in July, at which point it had risen 10 % in 2007, despite heavy intervention by the central bank. The rupee was trading around 40.80 on Thursday.
Jalan, who declined to comment on the current level of the rupee and the central bank’s policies, welcomed the finance ministry’s decision in August to curb the amount of money local companies could borrow overseas and bring into India. “The quantum of appreciation can have a difference on the real economy,” he said. “We are competing with labour-intensive countries like China, and we can’t afford to let the rupee hit 15 per dollar on just capital inflows.”
Jalan said the inflationary outlook is likely to remain benign because of normal monsoon rains. REUTERS