An Interview with Viral Acharya: India does not have enough markets

The following is a LiveMint interview with NYU Stern Professor Viral Acharya: 

Viral Acharya, NYU Stern

Mumbai: While the Reserve Bank of India (RBI) has tightened liquidity to protect a depreciating rupee, the government has been easing foreign direct investment, or FDI, norms in a few sectors to ensure flow of funds from overseas. Viral Acharya, C.V. Starr professor of economics at New York University’s Stern School of Business department of finance, said growth needs to pick up in India quickly. He said in an interview that policy reforms are needed, especially with regard to infrastructure and FDI limits need to be removed in some more areas to attract foreign capital. Edited excerpts:

Can you throw some light on your research into regulatory failures in the Indian context?

My research has focused on the fact that while there were market failures based on the originate and distribute model, and induced deterioration of mortgage underwriting quality, there were signals to the regulators on the collective housing market exposure building up on bank balance sheets, especially in most of the Western economies, notably in the US. This was a regulatory failure in that the collective housing exposure was building up despite the (apparently) strict capital requirement regime that regulators had for banks.

If you contrast this with India, you could argue that the Indian regulators did recognize in 2006-07 that retail mortgage lending was becoming a collective exposure of the banking system and by revising sectoral capital requirement on retail mortgage lending, the regulators averted a significant housing market boom and bust.

I would say in some sense there was regulatory success in India in that particular episode but, of course, the broader issue is that we simply do not have enough markets, such as various types of non-government bond markets and various kinds of derivatives. These are not yet developed to a point where corporations and banks can manage and hedge their risks much better.

Read the entire LiveMint interview.

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