Subprime woes not over yet: RBI

The Reserve Bank of India (RBI) fears that greater global credit tightening could emerge from the US subprime mortgage market problems, which might put financial stability in India as an issue of significant importance on its agenda.

The central bank has pointed out that the implications of the disruptions caused by the global credit crunch induced by the subprime crisis in the US on the global economy are not yet clear.

If the US economy were to experience a sharper slowdown because of a broader-than-expected impact of the housing sector difficulties, the spill-over effects into other economies would be larger and decoupling from the US would be more difficult, the RBI said in its annual report for the year ended June 2007.

There are concerns that problems in the subprime mortgage market could lead to a more significant tightening of consumer credit thereby putting household finances under greater strain.

The subprime crisis might be symptomatic of loose lending and underwriting standards over a broader range of markets. A resultant worsening of credit crunch across the US and global financial markets would imply a deeper and more prolonged slowdown or even a recession in the US with potential spillovers to other countries, the annual report noted.

The RBI, without making any specific reference to any country including India, said recent developments indicate that subprime lending concerns are spreading globally. Further deterioration in subprime delinquencies could lead to reassessment of risk by investors across products and markets and retrenchment of capital from the emerging market economies given the contagion and herd mentality, the RBI warned.

The central bank went on to whip its usual targets - the hedge funds and private equity funds that have emerged as a key source of capital flows to the emerging markets. Any further monetary tightening in major economies and reassessment of risks by investors has the potential to accentuate volatility in global financial markets, and adversely impact growth and stability in the emerging markets.

The stance of the monetary policy for the rest of 2007-08 would be conditioned by the patterns in which the global, and, more particularly, the domestic environment unfold. And contextually, financial stability may assume greater importance in the months to come.

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