William Pesek talks about India

Please note that this post is quoted from bloomberg.com where William Pesek is a News columnist. The opinions expressed are his own.

You can read more of his works at http://www.bloomberg.com/apps/news?pid=20601039&sid=aci0cIyx4d94 


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Oct. 19 (Bloomberg) -- China and India share a dubious honor as the global crisis wanes: They are home to two of the world’s most obvious stock bubbles.
First, credit where it’s due. Both economies have done remarkably well this year, with China zooming along at 7.9 percent and India at 6.1 percent. Considering Japan and the U.S. are shrinking 7.2 percent and 3.8 percent, respectively, we must tip our hats to officials in Beijing and New Delhi.
The same can’t be said of events in Shanghai and Mumbai, where stocks are surging, with gains of 62 percent in Shanghai and 80 percent in Mumbai this year.
Investors could merely be thinking long term. Asia’s two nascent superpowers are dripping with as much potential as they are ambition. And investors do need something to buy these days other than low-yielding government debt. Yet do the prospects for the Chinese and Indian economies justify such spectacular stock rallies? It’s doubtful.
Asset prices are being driven more by unusually low interest rates than economic fundamentals. It’s time for policy makers to mop up that liquidity. That includes Federal Reserve Chairman Ben Bernanke in Washington.
Australia’s Oct. 6 move to raise rates from 3 percent to 3.25 percent has markets buzzing about which economy will be next. Those betting on South Korea were proven wrong on Oct. 9 when the central bank kept rates at a record low. Attention is turning to India, where inflation is accelerating.
India’s Predicament
India’s predicament has economist Maya Bhandari of Lombard Street Research Ltd. in London calling for steps similar to those taken by former Fed Chairman Paul Volcker in the early 1980s. “India could soon need Volcker’s policy,” she says.
Consumer prices paid by Indian farm workers jumped 12.89 percent in August from a year earlier. The inflation rate for industrial workers was 11.72 percent in the same period. Add in this year’s gain in the Mumbai Stock Exchange Sensitive Index and it’s hard to argue that 3.25 percent is an appropriate level for India’s reverse-repurchase rate.
India has too much of a good thing on its hands. Bubble troubles are cropping up in real-estate markets, too, putting central bank Governor Duvvuri Subbarao in a very difficult position. Raise rates too abruptly and the living standards of India’s 1.1 billion people take a hit. Act too timidly and Asia’s third-biggest economy overheats.
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