Even as fears of the US recession cast a cloud over Indian skies, stock markets across the world are waiting to see how adjustable rate mortgage (ARM) repricing would pan out in the US towards the end of this month. The key question in investors’ mind is whether a resetting of interest rates would trigger another bout of subprime contagion and volatility in world markets?

Though most experts in the Indian market believe all aspects pertaining to the US subprime credit defaults have been factored in, there is still some amount of apprehension in the market.

ARM is a borrowing facility with an interest rate that is linked to an economic index. The interest rate and the borrower’s payments are periodically adjusted to the changes in the index. There are pre-determined rate caps to limit the lender from overcharging the borrower.

According to experts, the biggest risk and opportunity happens to be the extent of slowdown in the US. If there is a severe slowdown in the US, then bets are off across all markets, including India. If there is a mild slowdown, where the slack is transferred from housing to capital spending, and to a lesser extent, net exports from the US, growth assets like India will do exceedingly well in the context of an US slowdown. If the US GDP growth slips from around 3.50% to 2.50%, emerging markets including India will do well.

"I think the real economy in the US is in serious trouble. The Fed’s decision to cut lending rates highlights that fact. So, the ARM reprising on September 30 could continue to brew constraints in the real economy. But a big equity market contagion due to subprime is pretty much discounted," said Narayan Ramachandran.

Though the Indian market is trying hard to distance itself from the US subprime market, there is a feeling that there is something worrisome that is lurking in the background.

"Though I am not an expert on this, subprime damage to the US economy is going to be far larger than what we are expecting. The US might go into much deeper recession," said Rakesh Jhunjhunwala.

Echoing Mr Jhunjhunwala’s concern, Nilesh Shah says, "The subprime is $1.2 trillion, and the size of the US is roughly $13 trillion. Subprime is more or less 10% of the total US housing market. Out of the US GDP, housing loan is $11 trillion or approximately 8% of the GDP."

Mr Shah adds, "I am not an expert on the US economy. But I know that today we have smoke in our house because there is fire in American homes. If they don’t put out their fire, we will have more fire. If there is furthermore fire, we will choke and probably become subconscious and their homes will be burnt down. The Fed has taken the first step to bring the extinguisher out. The general feeling is that they will be able to contain it."

Though, no one in the market is sure as to how India would be impacted, there is a feeling that subprime and the US recessionary fears would not muffle Indian market in the long term. Many feel that the long term impact of subprime would be beneficial for India, as people would realise that RBI has curtailed chances of subprime credit defaults in the country.

“I don’t think subprime is a huge problem. It is bound to impact Indian markets only in the short-term,” said Vallabh Bhanshali. Reiterating this, Mr Jhunjhunwala said: “India would only be impacted in the short term. I think, subprime scare will also lead to a fall in commodity prices and interest rates worldwide.”

Another thought process evolving in world markets is the substitution of key markets with the dramatically changing commodities market. Over the past few years, commodities have been changing the world dramatically. Wealth is there with people having ‘commodity tradables’ like oil. Growth is seen everywhere in the commodity spectrum and the cycle has seen unprecedented growth, investment experts say.

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