India: Vote of Confidence in Turbulent times

Washington, Oct 22 India will be affected by the global financial meltdown but strong fundamentals and a pro-active monetary policy management will possibly allow it to ride the crisis, a World Bank study says.In South Asia, “the largest economy, India, is relatively more exposed to the contagion effects of global financial markets through adverse effects on capital flows from portfolio and direct foreign investments,” said the study on ‘Global Financial Crisis: Implications for South Asia’.

It would also be affected “through exposure of domestic financial institutions to troubled international financial institutions and to contracts - including derivatives -that have undergone large value changes,” it said.

“The evidence so far shows significant losses in the stock market and a reduction in the flow of foreign capital.

“Yet these risks are countered by a fundamentally strong macro economy including prudent foreign debt management, high savings rate, solid financial sector health, and a pro-active monetary policy management that will likely allow India to ride the crisis without destabilizing the financial sector.”

The main effects of the global financial crisis will be to reduce the availability of funds leading to higher interest rates and lower public and private investment that will hurt growth. Full report (pdf)

(Final paragraph is the key: Redemption pressure on hedge funds is creating forced liquidations. Foreign institutional investors are selling Rs 1000 cr per day. While valuations are approaching attractive levels the risk of a liquidity event is keeping buyers on the side-lines. In this environment banks have to maintain their capital adequcy ratios and have significant liquidity cushions.. Eliminating lending to over-extended sectors is the remedy...this leaves the realty companies badly exposed. Lee)