It’s almost as if the Reserve Bank of India (RBI) is stuck in a bad movie, watching a replay of the same scenes it observed three years ago. In 2006-07, there were ominous signs of overheating: Asset prices were shooting up to unsustainable levels, creating a classic “bubble" that would have to burst at some point.

Illustration: Jayachandran / Mint

At the start of 2010-11, a lot of these signs are back. Mintreported on Monday that the sharp recovery is again prompting similar concerns, with a Mumbai apartment last week selling for Rs37.25 crore. The question for RBI, as it prepares its annual policy statement for next week, is whether it will do what it did the last time.

To be fair, the movie may not exactly be the same; or, rather, it may not have gotten to the same scene yet. In 2007-08, annual credit growth was in excess of 30%, property developers were making record deals and companies’ shares were trading at 27 times their earnings—called the price-earnings (P-E) multiple—far from the Indian market’s historical trend. It was surely fair to characterize that situation as a “bubble".

Consider the situation today. For the last week, P-E multiples have been in excess of 21. Commodities are rallying: Last week, gold hit its highest since December. All these bring back memories of 2007-08, when RBI, concerned about the financial system being awash with liquidity, put its foot down. For the last two quarters, RBI has already been pointing to excess liquidity.

At the same time, it is sobering to note that annual credit growth hasn’t crossed 17%, with bankers expecting it to be only around 20% this year. So it will be interesting to see what RBI says next week. We would think that, while there are surely enough indicators for the central bank itself to be vigilant, we aren’t at the point where we have to start screaming bubble in crowded asset markets.

Considering policymakers are watching the same movie again, they should also be asking why. A young developing country such as India shouldn’t be experiencing wear and tear with rapid growth. Yet, it doesn’t seem to absorb excess liquidity.

But that goes back to India’s old reform dilemma. Money goes into the same stocks and real estate areas because there aren’t other avenues available. There aren’t enough companies offering good stocks and there aren’t solid property rights to get a more liquid housing market. And there are still parts of the economy—agriculture, retail—not open to investment. Until these reforms are executed, India is probably doomed to watching the same movie again and again.

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