The US sub-prime crisis was on everyone’s mind at the 38th annual general meeting (AGM) of Indo-American Chamber of Commerce (IACC). At the panel discussion, ‘Recent Global Developments – Impact on Indian Capital Markets,’ industry experts were certain that the sub-prime crisis will stunt the global economy in the short run, and Indian capital markets have to be watchful. Chief Guest and keynote speaker Dr Rakesh Mohan, deputy director of Reserve Bank of India (RBI), sounded a note of caution and exhorted Indian capital markets to be on their guard to protect themselves from the recent mortgage crisis.
The panel comprised Rakesh Jhunjhunwala, partner, Rare Enterprise; Vallabh Bhansali, chairman, Enam Securities; Andrew Holland, chief administrative officer, EVP DSP Merrill Lynch; and Michael Newbill, chief of Political Section, US Consulate. SK Mitra, executive committee member of IACC, chaired the discussion.
Jhunjhunwala predicted a slowdown in the Indian software industry and a cut in software spends as a result of the slump in the US economy. The upside, according to him, was a decline in commodity prices in India. He said, “The US economy was growing at an unsustainable level. The poor are feeding the rich, and the heroin credit supplied to the US consumers has its limit. The world is underestimating the sub-prime crisis. I foresee the problem in the housing market to get worse. The resultant slowdown of the American economy will worsen the crisis.”
However, the panelists were optimistic that the crisis can be tided over as the United States enjoys the advantages of sound capital markets, rising wages and low inflation. They said that “India was on a steady wicket” and the quality of private enterprise is better than in China. The US elections and the forthcoming Olympic Games in China will also be factors that need to be watched out while charting out a roadmap for Indian capital markets.
Rakesh Mohan said, “There has been a sustained attention on the sub-prime crisis in the last two months. We really don’t know what will transpire. Given the speed at which the market corrections are taking place, we have to be watchful. We will need to gather more information and knowledge to see what will actually happen in the future.”
Terming the crisis as a symptom rather than a cause, Dr Mohan explained the reason behind the phenomenon. He said, “The accommodative monetary policies resulted in sustained low interest rates, lower inflation levels and volatility encouraging more risk-taking. Many banks set up Special Investment Vehicles off their balance sheets, and hence had to face liquidity problems when the crisis erupted. But they have to make adjustments now.” Dr Mohan emphasised that capital markets have to be regulated better and risks have to be managed well.
Michael Owen, consul general, Consulate General of USA, was optimistic that increasing wages, sustainable inflation and innovative financial and credit instruments will enable the world economy to post strong growth in the long term.
Overall, the Indian as well as global capital markets will see a tough year ahead, but the long term should see sustained growth.