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RBI Governor Says Stock Market Bubble Won’t Cause A Major Problem

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10 February 2018


RBI Governor Urjit Patel today said the stock market bubble should not “lead to a very major problem” even has he stressed on the need for the regulators to be cognisant of the risks going forward.

“There has already been a correction not only globally but in India and therefore in a way it underscores how capital markets can change direction,” Patel said referring to the rout in the domestic and global stock markets. “So far neither globally nor in India have we felt that this bubble could lead to a very major problem. However, as financial market regulators both RBI and Sebi need to be cognisant of the risk going forward.”

Addressing the media after a customary post-Budget address by Finance Minister Arun Jaitley to the RBI’s board, Patel said the correction in the last few days underscores that market indices can move pretty quickly.

“I think the good thing in this cycle of high equity prices is that almost everyone who has been part of this has talked about a possibility that this cannot go on too long….I think that is good so that there is enough risk aversion that is endogenous, built up by the investors themselves.” – Arun Jaitley, Finance Minister

Stock markets have been on a sharp downslide this week, barring just one session, amid a global rout in equities. The benchmark indices fell by over 1 percent yesterday to close at a one-month low level. While the Sensex had managed to gain 330 points on Thursday, it had lost more than 2,200 points in the preceding seven trading sessions amid negative domestic and global cues.

Jaitley said the decision to pay farmers aminimum support price of 1.5 times the cost during the kharif season issue was discussed in the meeting with the RBI. “How to implement this and what impact it can have on farmers, commodity prices and export competitiveness, all these issues were discussed academically.”

Rate Cut Transmission Good, Says Patel

On the banks’ lending rates, Patel said one of the banks reduced its MCLR (Marginal Cost of funds-based Lending Rate) two days ago. “In terms of transmission if you measure since the easing cycle started by the MPC (Monetary Policy Committee) and you compare the MCLR now, actually there has been good transmission.”

“Actually what happened was that transmission came late and I must admit that some of the transmission came after demonetisation because we had a financial intermediation taking place in the system,” the governor said.

Patel also said monetary policy decisions need to be “forward-looking” and cannot be taken on the basis of day-to-day inflation rates.

Stating that it is difficult to predict global oil prices, he said the global charts have shown two-way movement in the recent days and there is a need to be prepared for both the scenarios of rising and falling rates.

Referring to his meeting with Sebi’s board in the morning, Jaitley said one of the factors that stood out in the market regulator’s presentation was that there is now an increased reliance on the bond market as far as credit is concerned.

Patel also said the capital market’s contribution to fund-raising has also gone up substantially.

“So we will have better equity-debt ratio (for corporates) given that the entities have been able to raise fair bit of equity. I think that… We are already at the credit growth of 11 percent or so,” he said.(Agencies)

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