"The funny money is gone and now we are all coming down to earth"

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: Subhomoy Bhattacharjee: We still do not know the extent of the toxic waste in the Indian financial system and unless that comes to light, we would not know whether we are really bottomed out, would we?

Uday Kotak: I agree that global de-leveraging is still on in a big way and when you have such high leverage on the asset side that is 30 to 35 times the debt-equity ratio, it has to be brought down to 10:1. You can do it in two ways. You add some equity or you have to sell some assets. Some of the assets are very poor quality loans. So as you deleverage you see a global shrinkage of money. In October 2007, India’s total FII equity, at market price, was around $280 billion and total reserves were close to $300 billion. Today that FII has come down to $75 billion. Another 20% has reduced because of rupee depreciation in dollar term, so it’s $140 billion minus that. The amount of money that has gone out is only $15 billion, but this amount going out has brought down the portfolio value from $280 billion to $75 billion. Look at trade from India’s point of view: the reserves that were close to $300 billion are $250 billion. My feel is that because of this toxicity, there is still money going out.

P Vaidyanathan Iyer: How close were we to a systemic crisis since there was a lot of camaraderie amongst market participants —corporates, banks and government institutions?

As deleveraging started, investors and savers around the world wanted their money back. So, worldwide, the dollar was moving back to the USA, which is why you saw a dramatic appreciation in the US currency against all other currencies. Dollar was also going away from India and this led to a tsunami-like situation. There was a mad rush of the dollar going back home. They were sucking liquidity out. Two things were happening. One, the rupee was depreciating because of the dollar outflow. Then, the RBI was supplying dollars to the market, and the moment you do that, you are sucking out rupees. So you had a depreciating rupee and a tightening interest rate situation as massive outflow of dollar was happening.