Regardless of the gloom in the global economy, financial markets seem to be charting their own course, rebounding from their March lows, when the covid crisis dealt a blow to commercial activity across the world. This strange buoyancy of asset markets seems powered by a raft of liquidity injections undertaken by central banks in rich countries to keep their economies from seizing up. But asset bubbles may pose a danger to financial stability, as the International Monetary Fund (IMF) has warned in its Global Financial Stability Report, out on Thursday.
The caution comes a day after the IMF forecast a 4.9% decline in global output in 2020, as the pandemic continues to rage on. This has made the recovery path highly uncertain. It could also saddle many borrowers with huge debts, which, as the IMF warns, could become “unmanageable". Defaults, in turn, could test the resilience of banks in some countries. Clearly, financial stability is at unprecedented risk today, even though asset traders appear not to have noticed. For India, it seems that risk could intensify if a global shake-up results in a flight of capital from emerging markets. We need to stay alert.