A wildfire swept across global financial markets on Friday fuelled by risky home loan defaults in the world’s economic engine, the US. In Europe and Asia it sucked the oxygen off stock values, not sparing those powered by global money in India.
Though India is emerging as a powerhouse economy with 9 per cent growth and is not a part of the bad loan problem, experts see a case for caution amid the turmoil. Analysts suggest Asian stocks could gain eventually as the global dust settles. But for now, there is volatility all around.
Central banks in the US, Japan and Europe came to douse the fire as traders and risky hedge funds reacted by pulling off money from global markets to book profits or cut losses. The banks have pumped in $182 billion to inject stability in the system, caused by subprime loans in the US given at high interest to those with poor credit records.
As US home prices have crashed by more than 30 per cent, defaulters are buying new property without paying off old debt, causing the meltdown in the market. These defaults have a cascading effect on earnings of US companies.
In India, although the economic fundamentals are strong, a drain of liquidity — or cash being sucked off the system — can affect the market acutely. In Mumbai, opening the day lower by 425 points, the benchmark Sensex oscillated 331 points during the day before closing 1.5 per cent lower.
The RBI intervened in the money market only in a minor way on Friday. It’s keeping a close watch as the arrest of inflow of dollars could weaken the rupee.
Market experts say redemption pressure on hedge funds will prevent the stock markets from moving up. The hedge funds are booking profits in India to redeem funds to the original investors. Foreign fund managers have withdrawn a
relatively insignificant $800 million from India since July 27, but experts feel markets will be volatile until clear numbers are put on the damage caused by risky home loans in the US.