Overheating, asset bubble concerns for economy: Moody’s

December 17, 2010 05:46 pm | Updated October 17, 2016 08:48 pm IST - New Delhi

Amid projections of up to over 9 per cent growth in the economy this fiscal, ratings firm Moody’s has cautioned against overheating that can result in probable asset bubbles.

“We see risks of an overheating economy given our expectation of continued strong economic and credit growth, while real estate prices in metropolitan areas and equity markets have already recaptured their pre-crisis peaks,” Moody’s vice-president Nondas Nicolaides said.

“We also see an increased risk of probable asset bubbles forming and posing a medium-to-longer-term challenge for the banking system,” he said.

Overheating refers to heightened demand unmatched by equivalent supply, that leads to increase in prices. This also gives rise to asset bubble.

After recording low level of economic growth in two years of global financial crisis — 2008-09 and 2009-10 — Indian economic growth accelerated to 8.9 per cent in the first half.

Mid-Year Analysis, tabled in Parliament recently, has projected the economy to grow by up to over 9 per cent this fiscal.

Equity benchmark index Sensex is hovering around 20,000 points, and had gone very near earlier this year to the peak of over 21,000 points, recorded in pre-crisis level.

Moody’s said even real estate prices in metropolitan cities have recorded their pre-crisis level.

Even as probable asset bubbles pose a risk for banks, Moody’s said regulatory limits on Indian banks’ exposures to sensitive sectors, including capital markets, somewhat temper its concerns.

Also, the asset quality pressures faced by Indian banks over the past two years will moderate, Mr. Nicolaides added.

Besides, Moody’s said the outlook for the Indian banking sector is stable due to favourable operating conditions, good capital levels retail deposit funding base.

It said that the credit outlook for the banking sector in the country is likely favourable for next 12-18 months.

“The outlook for India’s banking system remains stable, reflecting favourable operating conditions, solid capital levels that remain sound in stressed scenario analysis, a strong retail deposit funding base, and sound liquidity,” Moody’s Investors Service said in its new Banking System Outlook on India.

“The banking system outlook expresses Moody’s expectations for the fundamental credit conditions in this banking system over the next 12-18 months,” it added.

Moody’s outlook comes at a time when the Reserve Bank has announced plans to inject Rs. 48,000 crore into the system through purchase of government securities, technically called open market operations (OMO).

0 / 0
Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in

Comments

Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.