Call it the problem of plenty, but rising foreign flows into Indian markets are now leading to over-heating here. At least that is what noted experts like Joseph Stiglitz believe. Stiglitz, a Nobel-Prize winning economist, recently called Indian policymakers to apply control on short term money flows. He termed these flows as ‘hot money’ that can disrupt Indian markets were they to flow out in case of a global crisis.
And Stiglitz is not alone in his beliefs. Even the chief of the IMF Mr. Dominique Strauss-Kahn had recently warned India against an economy that could overheat quite quickly. These views surely must leave the policymakers here in a tizzy.
Anyways, we believe that capital inflows seem to be more a result of loose monetary policy in the western world than an indicator of India's strong fundamentals. And hence, these should not be allowed to unsettle the Indian economy by overheating it and creating asset bubbles. While the RBI has acted in bits and piece, by raising interest rates almost seven times this year, the effect has been minimal to say the least. Inflation, which has come down over the previous month is still very high at around 8.5%.
The key worry with inflation does not lie in the present. A bigger danger is the expectations of high inflation in the future, which can derail the economic recovery. This is given that such an expectation will lead the RBI to raise interest rates more aggressively than is currently expected.
High inflation and asset bubbles can completely change the investment landscape in India. And you need to carefully guard against these demons.