under control, increased demand for domestic liquidity will push interest rates higher andwe are likely to witness gradual rupee depreciation and depleted currency reserves.Overall, while RBI would inject liquidity through CRR/SLR cuts, maintaining growth beyond 7% will be a struggle.The banking sector will have the least impact as high interest rates, increased demand for rupee loans and reduced statutory reserves will lead to improved NIM while, on the other hand, other income from cross-border business flows and distribution of investment products will take a hit.Banks with capabilities to generate low cost CASA and zero cost float funds will gain themost as revenues from financial intermediation will drive the banks’ profitability.Given the dependence on foreign funds and off-shore consumer demand for the Indiagrowth story, India cannot wish away from the negative impact of the present globalfinancial crisis but should quickly focus on alternative remedial measures to limit damageand look in-wards to sustain growth!
India and the global financial crisis
C. P. Chandrasekhar Jayati Ghosh
While India is not likely to face a financial meltdown of the kind that was nearly experienced in the US, theglobal financial crisis will certainly have an impact. In this edition of Macroscan, C. P. Chandrasekhar and Jayati Ghosh consider the possible negative effects of the crisis on India and whether the Government’sresponse so far has been appropriate.
When the financial crisis erupted in a comprehensive manner on Wall Street, there was some prematuretriumphalism among Indian policymakers and media persons. It was argued that India would be relativelyimmune to this crisis, because of the “strong fundamentals” of the economy and the supposedly well-regulated banking system.This argument was emphasised by the Finance Minister and others even when other developing countries inAsia clearly experienced significant negative impact, through transmission of stock market turbulence anddomestic credit stringency.These effects have been most marked among those developing countries where the foreign ownership of banks is already well advanced, and when US-style financial sectors with the merging of banking andinvestment functions have been created.If India is not in the same position, it is not to the credit of our policymakers, who had in fact wanted to goalong the same route. Indeed, for some time now there have been complaints that these “necessary”reforms which would “modernise” the financial sector have been held up because of opposition from the Leftparties.But even though we are slightly better protected from financial meltdown, largely because of the still largerole of the nationalised banks and other controls on domestic finance, there is certainly little room for complacency.