Sunday, September 2, 2007

India real estate market and U.S. Subprime crisis - 5

RBI was right about hedge funds

Those who have been criticizing RBI for its so-called anti - hedge funds posture may have to eat humble pie given that the sub prime fiasco will definitely impact emerging economies like India. Happily, the RBI has broken its silence on the fiasco.

RBI’S VIEWS on the sub prime fiasco and its likely impact on emerging markets like India have been conveyed through its Annual Report for 2006-07, which was released on Aug 30, 2007.

The RBI rightly fears that this could result in outflow of capital from India.

In a country like India, the net capital inflow should at least take care of the current account deficit on the Balance of Payments (BoP). We have been showing a deficit on the current account of the BoP for quite some timenow.

Market analysts believe that India may be insulated from the current sub prime market crisis in the medium and long term, but not in the short term.

In the days ahead, hedge funds in the US will start receiving redemption requests from investors, which would oblige the FIIs to sell. Hedge funds invest in our market through the participatory notes issued by FIIs. This will lead to a contraction and pullout of liquidity from participatory notes. Hedge funds that face redemption pressures would rather sell in emerging markets like India, where they have made more money lately. This is bound to embarrass those who have always insinuated that the RBI is unduly critical of the hedge funds that invest in our market.

S.Shivakumar, merinews

Subprime crisis might spread, says RBI

The Reserve Bank of India (RBI) has said financial stability in India could assume greater importance in coming months amid fears the US subprime mortgage crisis might spread.

The concerns

# Financial stability in India to assume greater importance
# US subprime crisis may lead to a more significant global credit tightening
# Capital withdrawal from emerging markets likely on further deterioration due to subprime crisis
# Growth impulses in India getting more broad-based but shortfalls in farm and infrastructure are constraints

...and the solutions

# Remove infrastructure constraints
# Improve domestic investment climate, particularly for SMEs
# Step up growth of agriculture, particularly foodgrains
# Fiscal empowerment with emphasis on higher provision for education, health, water and sanitation
# Intensified vigil on price and financial stability

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