Bob E Rubin, chairman, executive committee, Citigroup and former US treasury secretary, does not have any views on the valuation of Indian equities but he feels that analysts and policy makers must take a close look at the sharp rise in indices.
Delivering the keynote address at the Citigroup's India Equity Conference in Mumbai on Tuesday, Rubin said: "Sometimes it seems as if every fund manager I know in New York either has an Indian private equity fund or has relatively recently begun investing in India through their existing funds. Despite India's favourable probabilistic prospects, these sharp recent stock market and capital flow phenomena call for analysis by investors and by policy makers whatever the conclusions might be."
The Indian stock market has risen by 250 per cent over the past three years and portfolio investment inflows from abroad have grown six folds in that period.
Rubin admitted that financial vulnerability of many emerging markets had been greatly reduced but "on balance", the "risks are probably greater and the markets may be underweighting them".
Describing "the much discussed liquidity" as a "state of mind" and "not so much a monetary phenomenon", Rubin said: "A change in confidence could lead investors to withdraw from riskier assets into very short term government instruments and liquidity would then be said to have shrunk".
If markets are overvalued, this could create a greater vulnerability if other risks materialise.
According to Rubin, hedge funds and private equity funds will continue to dominate the asset management scene as they provide many advantages to investors.
However, many of these funds would disappear owing to "inadequate performance". Referring to the debate on whether the hedge funds increase the volatility of markets and "influence" them, Rubin said: "The effects are, on the whole, not material."
He, however, made it clear that many hedge funds might have different strategies but have "underlying commonality" as suggested by performance data. They could exacerbate sharp market movements as many of them might race to exit the market collectively.
Rubin is in favour of opening up of the Indian financial system as it would benefit the system by making the local banks more competitive. The Reserve Bank of India has already chalked out the roadmap for opening up of the sector.
In the regulator's scheme of things, foreign banks can acquire local players after April 2009. "It's worth considering if the pace (of opening up) can be more rapid," Rubin said.
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