SUB PRIME or DEPRESSION
This past few weeks had been turbulent for stock exchanges across the world. India had its own share of problems which is a spill over of what is happening in the west – now this is what most analysts are saying and so I do not want to disagree on the spillover effect. A point to ponder is can we pass the blame completely to the sub-prime crisis in the US of A. A little more thinking and I feel a big NO.
The Indian story is as true as it was a few years ago and in fact more robust for the coming years. The financial crisis in the west had a deprecating effect here and it was expected as the FIIs had to average out their capital losses with gains some where or at least protect assets from depreciating further. Even at 12000 levels the FIIs are major not in red in Indian market as they brought the market here in the 1st place from sub 5000 levels and had booked profits intermittently. So they still have cushion to avoid cash losses if they haven’t suffered yet. The Indian Institutional investors are in same situation albeit with redemption pressure looming on their otherwise sales counter. Apart from this, we need to accept that we had reached a point where assets were getting overvalued, which was a supply issue especially lower supply of food grains, energy, industrial capacities, good equities, good assets etc. and oversupply of money. And what we had was an asset bubble. Asset price bubble is not without reason but it was only ahead of time. Therefore, I say this is a time when investment assets are getting rationalized. We might see a same rationalization in property assets too.
The bigger or core crisis is a financial crisis and not a business crisis though the repercussions are on businesses. The prognosis is therefore a financial prognosis and playing with elements which might tweak or imbalance consumer demand could be unpredictable in its direction. A play in interest rates especially a reduction or reduction in CRR requirement could stoke inflation and could push interest down temporarily and over a longer period push it up. Even as a financial crisis it is not a liquidity crisis across markets. Banks have money as the loan disbursement figures show. The cash is not going anywhere especially risk associated assets in this volatile time, it is only breeding no confidence in the system. There is some interest pressure in inter bank call money market now this indicates some banks are in bad shape and requires quick addressing by RBI. The percentage of savings to GDP is still strong. There has been some loss of liquidity due to capital flight. Capital flight form secondary market has a lesser impact gradually as more units/assets are offloaded at lower price.
There are instances across publications where the current crisis in US is compared to the great depression of 1929. This is not right and complete wrong interpretation of the situation and could be dangerous as wrong diagnosis could lead to a wrong prognosis. The 1929 depression was marked by serious fall in demand and fall in employment thereof. Keynes’ antidote was appropriate and unparalleled. Do we need measures to curtail or resolve the crises? If it is to curtail, then a temporary infusion could lend some confidence to the market but recovery could take same time but with less shocks. To resolve we need another round of banking reforms so a larger section of the population is protected and off course regulatory measures are required. The contagion effect of financial adventures in globalized world is quite new for most analyst and central banks, and therefore calls for more research and understanding.
Santosh Shetty
