RBI, SEBI need to be cognisant of stock market bubble risks: Urjit Patel

Our Bureau New Delhi | Updated on February 11, 2018 Published on February 11, 2018

Finance Minister Arun Jaitley and RBI Governor Urjit Patel at the RBI Board meeting in New Delhi   -  Kamal Narang

Recent correction in equity prices underscores how capital market can quickly change directions, says RBI Governor

Asserting that the recent “bubble” in equity prices had not created any problem for regulators in India and abroad, RBI Governor Urjit Patel on Saturday cautioned that both the RBI and SEBI, however, need to be “cognisant of risks going forward”.

The recent correction in equity prices underscores how the capital market can quickly change direction, Patel told a press conference soon after Finance Minister Arun Jaitley's customary post-budget address to the RBI's Central Board.

The good thing about the recent equity price spurt is that everyone involved with the market was talking about how the valuations were stretched and there was an endogenously built risk aversion to this trend, Patel noted. The RBI Governor was responding to a question on whether he sees a “bubble” like situation in equity prices, given the caution conveyed in the recent Economic Survey on the surge in equity markets.

Monetary Policy

Patel also defended the RBI’s tight monetary policy stance even when retail inflation remained low. He said the central bank’s monetary policy was “forward looking” rather than “looking at inflation rates of today or yesterday”.

The RBI had, on Wednesday last, kept policy rates unchanged and warned of inflation risks skewing upwards in the coming quarters. It raised the March quarter retail inflation (consumer price inflation) forecast to 5.1 per cent and projected an inflation range of 5.1 per cent to 5.6 per cent in the first half of next fiscal year.

Finance Minister Arun Jaitley, who was present at the press conference, described the RBI’s latest monetary policy stance as a “balanced” one.

Asked if the Budget announcement on Minimum Support Price (MSP) would be inflationary, Jaitley said that the topic of MSP did feature in the discussions he had with the RBI Central Board members. However, the discussions were more academic in nature, he noted.

Credit growth

Patel said that banking credit growth stood at 11 per cent, which is very encouraging. The other interesting aspect is that capital markets funds raising has gone up substantially in the system with corporates tending to raise more debt resources from the markets. “This has led to higher debt-equity ratios and this trend bodes well,” Patel said.

Finance Minister Arun Jaitley said SEBI had, in its presentation to him earlier in the day, highlighted that corporates are now increasing their reliance on bond markets and this was an encouraging trend.

Fiscal situation

Jaitley said that he sees the next year to be “comfortable” on the revenue front, although it would be difficult to say at this stage if there would be any fiscal slippage in the next year as well.

“I can’t say at this stage if there will be a fiscal slippage next year. It is impossible to predict how oil prices would move,” Jaitley said.

RBI Governor Patel said that one needs to be prepared either way — oil price increase or decrease — as one can't predict how oil prices would move in the next year.

Published on February 11, 2018
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