IMF sees some ‘hot spots’ in Indian equities markets

WASHINGTON - Suggesting that some “hot spots” appear to be emerging in the equities markets in some countries including India, the International Monetary Fund (IMF) Tuesday said global financial stability is still not assured.

“Nearly four years after the onset of the largest financial crisis since the Great Depression, global financial stability is still not assured and significant policy challenges remain to be addressed,” it said in its latest Global Financial Stability Report (GFSR).

Balance sheet restructuring is incomplete and proceeding slowly, and leverage is still high, it said.

The interaction between banking and sovereign credit risks in the euro area remains a critical factor, and policies are needed to tackle fiscal and banking sector vulnerabilities, IMF said suggesting that “at the global level, regulatory reforms are still required to put the financial sector on a sounder footing”.

At the same time, accommodative policies in advanced economies and relatively favourable fundamentals in some emerging market countries are spurring capital inflows, IMF said.

This means that policymakers in emerging market countries will need to watch diligently for signs of asset price bubbles and excessive credit, it said.

While capital inflows are normally beneficial for recipient countries, sustained capital inflows can strain the absorptive capacity of local financial systems, IMF warned retail flows into debt and equity mutual funds have been strong, particularly for equity funds, and could give rise to the formation of asset price bubbles if local assets are in limited supply, it said.

“Although most measures of equity valuations are within historical ranges, ‘hot spots’ appear to be emerging in the equities markets in Colombia and Mexico and, to a lesser extent, in Hong Kong SAR, India, and Peru,” it said.

Inflows can also lead to a rapid increase in private sector indebtedness in recipient countries, it said. In some economies in Asia and Latin America, non-financial private debt is approaching the maximum ratios reached between 1996 and 2010, IMF said citing the examples of India, Brazil, Chile, China, and Korea.

While in some countries the change may represent financial deepening and healthy market development, in other countries it could signal an increase in risk, and it is important that country authorities remain vigilant, it said.

Even though global economic growth has accelerated somewhat, global financial stability has yet to be secured. The two-track global recovery-with advanced countries growing much more slowly than the rest of the world-continues to pose policy challenges.

The slow growth prospects of advanced economies and the continued weakness in their fiscal balances have raised the market’s sensitivity to debt sustainability risks, IMF said.

(Arun Kumar can be contacted at arun.kumar@ians.in)