Need to be cognisant of market bubble risk, says RBI governor Urjit Patel

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New Delhi | Published: February 11, 2018 4:33:28 AM

Urjit Patel says monetary policy decisions have to be forward-looking.

RBI governor Urjit Patel, RBI, Urjit Patel, economy, indiaFinance minister Arun Jaitley and RBI governor Urjit Patel (centre) at the central board meeting of RBI in New Delhi on Saturday. (PTI)

Reserve Bank of India (RBI) governor Urjit Patel on Saturday said the recent stock market crash is unlikely to cause any “major problem”, but regulators must still continue to be cognisant of associated risks.

Patel defended maintaining a “tight” monetary policy even when inflation was low, saying policy decisions have to be forward-looking rather than just a reflection of short-term movement of inflation rates. He added that suggestions by some people last year to trim rates on the ground that oil prices were unlikely to bounce back sharply were later
proven wrong.

Speaking to the media after a customary post-Budget address by finance minister Arun Jaitley to the RBI board in Delhi, Patel said the recent correction in stock markets across the world and in India underscores “how capital markets can change direction”.

“So far neither globally, nor in India, have we felt that this bubble could lead to a very major problem. However, as financial market regulators, both RBI and Sebi need to be cognisant of the risk going forward,” Patel said.

“I think the good thing in this cycle of high equity prices is that almost everyone who has been part of this has talked about a possibility that this cannot go on too long. I think that is good so that there is enough risk aversion that is endogenous, built up by the investors themselves,” he said.

Barring one session, stock markets have witnessed a slide this week, amid a rout in global equity markets. While the Sensex managed to gain 330 points on Thursday, it lost more than 2,200 points in the preceding seven sessions. Even the Economic Survey of 2017-18 recently flagged potential risks of elevated stocks prices correcting sharply, provoking a “sudden stall” in capital flows.

Patel said global oil price fluctuations are difficult to predict and prices have witnessed a two-way movement recently, while stressing on the need to be prepared for both rising and falling rates scenario.

In a reference to analysts asking the Monetary Policy Committee to cut rates on grounds oil prices might not surge, Patel said: “A few months ago, in June or so, people were talking about oil prices never going above $45 per barrel and some advice had come to the MPC based on that.” Global oil prices have receded a bit in the past two-three days after rising in recent months. There have been lingering concerns about potential headwinds from a rise in crude prices. Brent crude futures dropped 3.1% on Friday to $62.79 a barrel, its lowest settlement since December 13 last year.

Patel said the capital market’s contribution to fund-raising has risen substantially. “So we will have better equity-debt ratio (for companies) given that the entities have been able to raise a fair bit of equity,” he said.

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