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This is what threatens the Indian economy

Last updated on: December 17, 2010 18:28 IST

This is what threatens the Indian economy

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Amid projections of up to over 9 per cent growth in Indian economy this fiscal, ratings firm Moody's has cautioned against overheating that can result in probable asset bubbles.

"We see risks of an overheating economy given our expectation of continued strong economic and credit growth, while real estate prices in metropolitan areas and equity markets have already recaptured their pre-crisis peaks," Moody's vice president Nondas Nicolaides said.

"We also see an increased risk of probable asset bubbles forming and posing a medium-to-longer-term challenge for the banking system," he said.

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Overheating refers to heightened demand unmatched by equivalent supply, that leads to increase in prices. This also gives rise to asset bubble.

After recording low level of economic growth in two years of global financial crisis -- 2008-09 and 2009-10 -- Indian economic growth accelerated to 8.9 per cent in the first half.

Mid-Year Analysis, tabled in Parliament recently, has projected the economy to grow by up to over 9 per cent this fiscal.

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Equity benchmark index Sensex is hovering around 20,000 points, and had gone very near earlier this year to the peak of over 21,000 points, recorded in pre-crisis level.

Moody's said even real estate prices in metropolitan cities have recorded their pre-crisis level.

Even as probable asset bubbles pose a risk for banks, Moody's said regulatory limits on Indian banks' exposures to sensitive sectors, including capital markets, somewhat temper its concerns.

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Image: The BSE building in Mumbai.
Photographs: Reuters
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Also, the asset quality pressures faced by Indian banks over the past two years will moderate, Nicolaides added.

Besides, Moody's said said the outlook for the Indian banking sector is stable due to favourable operating conditions, good capital levels retail deposit funding base.

It said that the credit outlook for the banking sector in the country is likely favourable for next 12-18 months.

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"The outlook for India's banking system remains stable, reflecting favourable operating conditions, solid capital levels that remain sound in stressed scenario analysis, a strong retail deposit funding base, and sound liquidity," Moody's Investors Service said in its new Banking System Outlook on India.

"The banking system outlook expresses Moody's expectations for the fundamental credit conditions in this banking system over the next 12-18 months," it added.

Moody's outlook comes at a time when the Reserve Bank has announced plans to inject Rs 48,000 crore (Rs 480 billion) into the system through purchase of government securities, technically called open market operations (OMO).


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