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The latest on India from Morgan Stanley’s Global Economic Forum: Sub-Prime, Risk Aversion and India

The risk-appetite growth linkage is as follows: rise in risk appetite – rise in non-FDI capital inflows – lower real rates – strong credit-driven growth. Indeed, India has increased its outstanding bank credit stock to US$480 billion from US$162 billion in April 2003.

. . . in the event of a sharp risk aversion in the global financial markets and/or a global hard landing, India’s growth cycle is far more vulnerable than the rest of Asia.

At the peak of the credit cycle in 1Q06, banks were making little distinction in pricing credit risk for various types of loan assets. Almost all loans were being priced in a narrow range of around 7.5-8%, similar to the 10-year bond yields at that time. Indeed, banks’ lending behavior implied that the risk of lending to a low-income-bracket borrower (for whom there is little credit history available) for the purchase of a two-wheeler was not meaningfully different from the risk of investing in government bonds.

Almost 82% of the total US$98 billion of capital flows that India has received over the past four years has been in the form of non-FDI flows.

This entry was posted on Friday, August 17th, 2007 at 8:02 am and is filed under economics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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