FII flows into India have been modest this year due to a shortage of liquidity in the global market and risk aversion, Mr U.K. Sinha, Chairman, Securities and Exchange Board of India, said at the India Finance Conference 2011 here on Friday.

“FII flows are vastly reduced from last year. The presumption is that part of it could be because of total shortage of liquidity in the global market and partly due to risk aversion,” he said.

In 2010, there was close to $30-35 billion FII flows, and about $35 billion FDI flows, he pointed out, adding that this year, FII flows are about $300 million. “Going forward, there is pressure on outflows than inflows, which will have pressure on asset prices,” said Mr Sinha.

If asset prices are disturbed, it will lead to stress on asset quality and development of non-performing assets in the banking sector, he said. There are some indications of stress in the banking sector already, he said.

According to him, European banks have an exposure of over $1 trillion to the private sector in the Asia-Pacific region, excluding Japan. “The mood now is de-leveraging and risk aversion,” said Mr Sinha, adding that if the European banks decide to move out even 10 per cent in a year, “we are talking of $100 billion. The impact could be significant,” he explained.

Admitting that there was a pressure on the fiscal situation in the country, he said that the country was not “well off to deal with the situation now as was in 2008.”

A co-ordinated action amongst regulations and the government is the need of the hour to handle the crisis. Technological changes also pose huge challenges to the regulatory capabilities, said Mr Sinha.

>anju@thehindu.co.in

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