We have earlier argued in this column that low volatility in global asset prices is a cause for concern. It means that investors are taking too sanguine a view of the future.
IMF, in its latest Global Financial Stability Report, released on Wednesday, warns that many markets could suffer from a “volatility shock”—a sharp increase in the volatility of asset prices.
This is something that should specifically concern Indian investors as well. IMF mentions two risks that are very relevant to us. One, the now-famous carry trade that borrows money at low interest rates in one market and invests it in another. Two, the rise of leveraged buyout (LBO) deals based in oodles of low-interest debt. (See stories on pages 15 and 24.) In different ways, each is important to India. A lot of the carry trade money has flowed into our markets.
And many Indian firms have gone in for high-profile LBOs. Both could be hit if there is a spike in volatility in the future.