Like in many EMEs, asset prices have risen sharply in India too. Should there be a reversal of capital flows, asset prices may decline but the banks exposure to the risky assets have been severely restricted by Reserve Bank’s regulatory actions.
Likewise, the equity market has also seen a sustained uptrend but efforts have been made by the Reserve Bank to cap the banks’ exposures. Further, banks in India have invested significantly in government debt and other fixed income securities. If a rise in international rates gets reflected in domestic interest rates, banks will have to mark down the value of their investment portfolio.