Ratna Sahay, Deputy Director of the IMF’s Monetary and Capital Markets Department, was here for an meet on Housing Markets, Financial Stability and Growth, sponsored by the IMF along with IIM-B. She shared the IMF’s views on the global economy and regulations of housing markets. Excerpts:
Has the drop in oil prices helped the emerging markets?
To an extent it has helped markets that import oil. Countries exporting oil like Venezuela, Russia and South Africa get affected.
Conducting stress tests to check the resilience of the banking sector has become common. It tells you whether the banking sector withstands a bad shock to the country.
If not, preventive measures can be taken to help. At the IMF, there are Financial Sector Assessment Programs. There were 25 countries that were considered systemically important globally. India also featured in that.
How do you think governments in emerging markets, including in India, are using policies to manage house price booms?
Emerging markets are taking a lot of macro-prudential measures like limiting the loans on the housing value (LTV). These are implemented on commercial properties as well. Not just the increase of the house value but also how these loans are financed matters.
What has been the effect of ‘twin booms’ in mortgage credit and house prices?
When house prices and credit were growing rapidly, we found that it leads to a decline in output or a financial crisis. In India, the issue is on the regulatory side. India is to an extent over-regulated. The financial markets don’t develop that fast. We need to simplify the regulations to allow the financial markets to deepen, thus enabling them to easily absorb shocks. But the RBI and the government are both very committed to take reforms in this sector.
What is your view on India’s housing market, financial stability and its future growth?
There is a lot of scope for development, keeping in mind that the market doesn’t develop too fast, creating risks. There is scope for growth as well with a lot of youth potential to be tapped. It can reach the level that China has reached so I am very hopeful that with the combination of the ideas that the new government has with the financial inclusion, along with the RBI and the new governor, the future looks bright.
Can you comment on the role of monetary policy and banking institutions in India in dealing with the housing sector?
India has recently begun to do well on the monetary policy side with sufficient policy tightening. One big indicator to tighten the policy was the inflation rate that was one of the highest in the world. So, RBI has done well in introducing the concept of inflation target. This is important so the markets can have a view as to where the authorities in India want to take the country with an aim and by using the right decisions.