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Dr Parthasarathi Shome

Our Bureau

Bangalore, Oct. 5 Indian banks’ losses are estimated at $2 billion on account of the sub-prime crisis in the US.

Speaking here today at a CII conclave on the sub-prime crisis in the US, the Economic Advisor to the Union Finance Minister, Dr Parthasarathi Shome, said the losses were estimated on the basis of a series of discussions with major banks and ratings agencies in the country.

The losses included both first order – direct or indirect exposures of Indian banks to the sub-prime mortgage market and second order – arising out of the impact of the banks’ exposure to equity investments.

He said the losses of four banks with international operations were estimated at anywhere between $1 million and $2 million each. But he added, “The losses are very limited in view of the limited direct exposure of banks in the US mortgage markets.”

The Government, he said, had assessed the potential impact of the crisis and the US Federal Reserve Board’s reactions to it. The assessment indicated that the crisis would result in some impact on the Indian stock markets.

Dr Shome said: “There would be a surge (of liquidity) since funds are escaping the combat zones elsewhere for the Indian safe haven. This is because India is the darling for these hedge fund locusts.”

Managing this hot capital flow, he said, was of concern, to the monetary authorities and the Government. Accordingly one policy direction was to allow more funds to be taken out of the country. As the impact of this policy kicked in and policy redirections occurred abroad, there could be a tempering effect on capital flows into the country.

Moreover as global liquidity begins to dry up as a result, the country would have to shift reliance to domestic sources of funds to remain on the high growth trajectory. He said that the ebb and flow phenomenon of global liquidity would increase the rupee volatility. “We need to be prepared,” he cautioned.

The immediate experience was that short-term capital inflows that had resulted in “phenomenal appreciation of the rupee” over the last one-and-half years, he said.

Imports as a result had become cheaper, but the appreciation was tougher on exports. This was particularly on exporters who have very little importables in their production process. The Government was carefully monitoring the situation he added.

The Government was prepared to use all the tools – interest rates, reserve ratios and direct interventions, to contain the liquidity impact as and when required.

Later the global strategist of Hong Kong-based brokerage and investment bank CLSA, Mr Chris Wood, praised the RBI for its handling of monetary policy.

He said, “My favourite world central bank is the RBI. It responsibly targets growth and inflation. The RBI talks less and acts tough.”

He said the sub-prime crisis had resulted in discrediting structured finance. Asia in general and India/China in particular were the expected beneficiaries of the crisis.

“The next round of the Fed easing will have positive impact on Asia, India and China in particular.” So long as the Indian economy is led by domestic demand, foreign investors would continue to chase Indian equities, he added.

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