The Reserve Bank of India (RBI) today expressed concern over investments by hedge funds in the stock markets and raised questions over the longer term sustainability of such investments worldwide. In its first quarter review of the annual monetary policy for 2007-08, the RBI has described how the hedge funds are facing solvency threats in the wake of continued slump in the US housing markets and said the “contagion” could spread to other credit and corporate bond markets, in a spiral of repricing, tighter mortgage & borrowing conditions, falling house prices and slower consumption growth. “With greater risk aversion going forward, with credit quality deteriorating and with the widening of credit spreads, the potential fragility of hedge funds could pose significant risks to financial market stability and to the prospects for financing and growth in the EMEs (emerging market economies),” RBI said. At present, hedge funds cannot invest directly in the Indian markets. However, they could invest through PNs issued by Sebi-registered FIIs.   more »