The recent Dubai debacle sends shivers down the spines of many who thought that the financial meltdown was restricted to the Western countries where there was gross mismanagement of funds. However, even as the world recovers from the aftermath of the Lehman Brothers? crash and the bursting of asset bubbles, there are signs that lessons have not been learnt.
The new issue emerging is from the dollar carry trade and even the pound carry trade. With interest rates at near zero levels in several western countries, it becomes attractive to borrow at these levels and invest these monies in the emerging markets. Moreover, parking funds in money market or debt instruments overseas would also fetch near zero returns. With these economies clearly set to not grow at impressive numbers, it does make sense to place these funds in emerging markets and commodities which are likely to see some movement.
Experts reckon that many of these funds are being routed into India as well and, therefore, there remains a significant amount of risk in the market place at the moment. Hedge funds are seen taking arbitrage positions in the market place and are willing to play for as low as 5% to 6% gains and with the chances of the currency strengthening, the pay-off is even better. The Yen carry trade that was witnessed in 2007 saw the markets moving into the irrational zone, and a tizzy was created. Several funds were extremely over-leveraged and started taking the market in an upward spiral that could not be contained and the returns attracted more monies.
And, when the unwinding of the carry trade started, the markets tanked to extreme depths. At the moment, things look smug as central bankers have not started to tinker with interest rates but when they do, the carry trade unwinding could start having a negative impact. Little wonder then that the powers that be are concerned and a committee under the chairmanship of UK Sinha of UTI AMC has been set up to track the nature of overseas inflows.
akash.joshi@expressindia.com