PM points to loopholes in capital markets

Imperfections in capital markets have drawn flak from Prime Minister Manmohan Singh, who said the loopholes generated information bubbles and a herd mentality among investors, sparking the spread of financial crises.

The 1997 Asian crisis had demonstrated that financial crises could be contagious as a result of imperfections in the capital markets, Singh said at the opening session of the annual meeting of ADB board of governors.

In panic situation, markets did not adequately discriminate between countries with strong and weak economic fundamentals and seemingly strong economies could be engulfed by a snowballing crisis, the PM said.

The Asian financial crisis hit countries that had built up an enviable reputation as miracle economies. The crisis arose due to four important factors. The exchange rates were pegged at unsustainable levels, which triggered a crisis.

Another reason was the fragility of financial systems that allowed enterprises to borrow without any regard for mismatches in current composition or maturity profile, Singh said.

Crises arose also due to flawed regulatory infrastructure in the financial sector and due to inadequacy of governmental systems in monitoring the quantum and nature of capital flows, Singh added.