India is in for a liquidity crunch

India is in for a liquidity crunch

* Joe Leahy, Mumbai
* January 30, 2007

INDIA'S real estate and stock markets are heading for a correction, with a liquidity crunch in the banking sector likely to accelerate the trend, according to one of the country's most influential bankers.
Indian stock valuations are inflated and property prices in many areas are beginning to exceed what people can afford to pay, said Deepak Parekh, chairman of the Housing Development Finance Corp, which controls India's second largest private sector bank.

"I'm concerned about overheating real estate prices. I'm concerned about overheating of stock markets, that some of the valuations are not justifiable," Mr Parekh said.

"The kind of returns people got in the last two to three years, they would be foolish to expect this year. The Indian story is fully priced."

Foreign investors eager to tap into India's rapid economic growth of above 8 per cent have been pouring funds into stocks and specialist private equity funds investing in property and other sectors.

India commanded nearly half of foreign fund flows into emerging markets tracked by Morgan Stanley last year, with the average market capitalisation last year nearly 50 per cent higher than a year earlier.

In cities such as Mumbai, housing prices have risen threefold since 2004, with residents reporting increases in rent of up to 2.5 times in two years.

"Real estate has to do with affordability. There is no point building houses of Rs10 million ($293,000) and Rs20 million when people don't have the resources to pay for them," said Mr Parekh, whose bank specialises in loans for first home buyers.

Banks such as HDFC and its rival ICICI, the country's largest private sector bank, have been reporting credit growth of more than 30 per cent, as Indians borrow to buy homes, cars and appliances.

But Mr Parekh warned that across the banking sector there was an emerging credit crunch, with loan growth outpacing deposit growth by about 10 percentage points.

"This is a cause of concern because this creates higher interest rates and this creates a slowdown of the economy," he said. "The Government keeps talking of a benign interest rate policy, but with demand for funds in excess of the liquidity available, something has to break somewhere."

He said he expected a correction rather than a crash, with the stock market likely to settle 10-20 per cent below its current levels and real estate price rises to stall rather than collapse.

Chetan Ahya, an economist at Morgan Stanley in Mumbai, said indicators such as inflation and property prices showed the current economic growth rate was unsustainable in the short term.