India’s subprime exposure limited, says ex-RBI governor Bimal Jalan

The Indian stock market hit a record high in July, before falling 13 per cent as the subprime fears roiled global markets. It has recovered strongly, rising on nine out of the last 10 days, to close today just 1.6 per cent below its record high. He said the Indian banks had very limited exposures to foreign loans, which would limit the direct impact of the subprime mortgage sector troubles.

IDBI Capital said in a report that data indicated India’s exposure to US mortgage markets was less than $500,000. Jalan, now a member of the Rajya Sabha, expected the economy to stay strong, but said global market turmoil or political instability were risks. “I think we are in good shape and growth is likely to remain high, irrespective of the actual numbers,” he said.

The economy grew 9.4 per cent in 2006-07, its fastest rate in 18 years, and the central bank expects it to grow 8.5 per cent in the fiscal year ending in March 2008. Attracted by the strong growth and a booming stock market, foreigners have been increasing their investments in India.

Those capital inflows helped drive the rupee to a nine-year high of 40.20 per dollar in July, at which point it had risen 10 percent in 2007, despite heavy intervention by the central bank. The rupee was trading around 40.80 today.

Jalan, who declined to comment on the current level of the rupee and the central bank’s policies, welcomed the finance ministry’s decision last month to curb the amount of money local companies could borrow overseas and bring into India.

“The quantum of appreciation can have a difference on the real economy,” he said. “We are competing with labour-intensive countries like China, and we can’t afford to let the rupee hit 15 per dollar on just capital inflows.” He said the inflationary outlook was likely to remain benign because of normal monsoon rains and as liquidity in the banking system was ample.