IMF-WB meet: Mayaram warns of asset price bubble

Urges more police coordination to buffer negative spillovers of police change, as with US Fed's reversing of easing; however, RBI chief says nothing much to worry on this score

The government has cautioned against  an asset price bubble  in emerging markets (EMs), a risk  to global  growth.  

On the sidelines of the annual International Monetary Fund-World Bank meetings in Washington, Finance Secretary Arvind Mayaram recently said there was a  situation  of  rising asset  prices  in EMs despite low inflation and growth.

Making a presentation during the G-20 deputies’ meeting, Mayaram  also  batted for more policy coordination to deal with negative  spillovers  of  development in some  advanced  countries, restore  growth and  support EM  economies.  The views were supported by China and Indonesia.

Mayaram said greater synergy would be required in international policy coordination to lift global  growth in the next five  years. Countries needed to also reduce negative spillovers and risks to the world economy as a whole.

The US Federal Reserve is expected to reverse its easy monetary stance by the start of next year.

When the US central bank signalled last year that it would begin easing its record monetary stimulus, foreign investors pulled $8 billion from rupee-denominated debt, in a move that pushed the currency to an all-time low, according to Bloomberg.

There have been forecasts of lower growth this  financial year  than estimated earlier. Concerns have been  raised about the possibility of asset  price bubbles in various sectors such as US  stocks  and Chinese real estate.

The IMF had last week cut its 2014 global growth forecast to 3.3 per cent from 3.4 per cent. Besides,  it warned of  possible “widespread disruption” in markets if any downside  risks take effect.  The Fund was primarily concerned that the liquidity the advanced world’s central  banks have  been unleashing are primarily  invested  in speculative assets, rather than  productive ones. As growth weakens and as the US Fed tightens the monetary stance, these  speculative  assets  could see price plunging.

Jose Vinals, the IMF’s top financial counsellor, recently said not enough of the easy money pumped into economies by advanced countries’ central banks was going into economic activities that propel growth. Rather, too much was going into financial risk taking that poses challenges to financial stability, he said last week, unveiling the IMF’s newest assessment of financial risks in the world economy.

However,  Reserve Bank of India Governor Raghuram Rajan said in Washington on Monday that he was not “overly” worried about any interest rate rise by the Fed.

He said this would create  some volatility in EMs but India was better  placed than before to  deal with the situation due to its high forex reserves, decline  of inflation in a substantial way, its fiscal  consolidation path and higher growth than in the recent past.