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Global Financial Crisis: Causes, Consequences and India's Prospects
Global Financial Crisis: Causes, Consequences and India's Prospects
Global Financial Crisis: Causes, Consequences and India's Prospects
Proximate causes
Sub-prime lending
Originate and distribute model
Financial engineering, derivatives
Credit rating agencies
Lax regulation
Large global imbalances
Fundamental cause
Excessively accommodative monetary policy in the US
and other advanced economies (2002-04)
Global Financial Crisis (2)
Current Account Balance (per
Country cent
1990- 1995- 2000-to2005
GDP)2006 2007 2008
94 99 04
China 1.4 1.9 2.4 7.2 9.5 11.0 10.0
India -1.3 -1.3 0.5 -1.3 -1.1 -1.0 -2.8
Russia 0.9 3.5 11.2 11.0 9.5 5.9 6.1
Saudi -11.7 -2.4 10.6 28.7 27.9 25.1 28.9
Arabia
United Arab 8.3 4.6 9.9 18.0 22.6 16.1 15.8
Emirates
United -1.0 -2.1 -4.5 -5.9 -6.0 -5.3 -4.7
States
Memo:
Euro area n.a. 0.9 0.4 0.4 0.3 0.2 -0.7
Middle East -5.1 1.0 8.4 19.7 21.0 18.2 18.8
Source: World Economic Outlook Database, April 2009, International Monetary Fund.
Note: (-) indicates deficit.
Global Financial Crisis (4)
US Monetary Policy (1)
Our Problems
Reduction in capital flows
Pressureon BoP
Stock markets
Our Problems
Fiscal stress
Oil,Fertiliser, Food subsidies
Pay Commission, Debt waiver, NRE
Stimulus packages
restrictions.
Capital outflows: progressively liberalized.
Differences Between Financial Crisis in
US/Europe and India (5)
India’s Approach to Managing Financial Stability
(2)
Financial sector, especially banks, subject to prudential
regulation
both liquidity and capital.
prudential limits on banks’ inter-bank liabilities in
relation to their net worth;
asset-liability management guidelines take
cognizance of both on and off balance sheet items
Basel II framework: guidelines issued.
Dynamic provisioning
NBFCs: regulation and supervision tightened - to
reduce regulatory arbitrage.
Scheme of Presentation
overseas branches
Measures since Mid-September, 2008 (3)
Encouraging Flow of credit
Exporters:
extensionof period for export credit.
Expansion in refinance
Dynamic provisioning
Contracyclical adjustment of prudential norms
SIDBI and NHB: lendable resources
expanded
Loan restructuring
Measures since Mid-September, 2008 (4)
Impact of Measures (1)
Measures ensuring orderly functioning of Indian financial markets
Cumulative potential primary liquidity impact – over Rs. 4,90,000 crore (9 % of
GDP)
Comfortable liquidity position since mid-November, 2008
LAF window in absorption mode.
Call rate within LAF corridor since November 3, 2008 – bottom of the
corridor.
Gradual reduction in deposit and lending rates of banks .
Government yields:
upward pressure from large market borrowing programme
MSS unwinding
Rupees crore
Item 2007-08 2008-09
1
Non-food Bank 4,44,807 4,14,902
credit
2
Non-banks 3,35,698 2,64,138
3
Total flow of 7,80,505 6,79,040
resources (1+2)
Measures since Mid-September, 2008 (7)
Inflation in India
(per cent)
Item March 2008 June 2008 September December March 2009
2008 2008
Wholesale price inflation
All commodities 7.8 12.0 12.1 5.9 0.3
Of which:
Primary articles 9.7 11.0 12.0 11.6 3.5
Fuel 6.8 16.3 16.5 -0.7 -6.1
Manufactured 7.3 10.9 10.5 6.2 1.4
products
Consumer price inflation
Agricultural 7.9 8.8 11.0 11.4 10.8 (Feb)
labourers
Rural labourers 7.6 8.7 11.0 11.4 10.8 (Feb)
Urban non-manual 6.0 7.3 9.5 9.8 9.9 (Feb)
employees
Industrial workers 7.9 7.7 9.8 9.7 9.6 (Feb)
Scheme of Presentation
international standards
contribute to the persistence of an interest rate
trinity
Issues for monetary policy
current account balance as a good guide to
real economy?
Medium-term Issues and Challenges (6)
External Sector (1)
Optimal response to the large and volatile capital flows is a
combination of (CGFS, 2009)
sound macroeconomic policies
prudent debt management
exchange rate flexibility
effective management of the capital account
accumulation of appropriate levels of reserves as self-insurance
and
development of resilient domestic financial markets
combination is country-specific; no “one size fits all”.
Medium-term Issues and Challenges (7)
External Sector (2)
Indian policy approach to CAL
Distinction between debt and equity
flows
Higher inflation and interest rates in
arbitrage flows
Ceilings on debt flows appropriate
Medium-term Issues and Challenges (8)
Financial Sector
(CFSA)
• Stability Assessment and Stress Testing
• ConcernsWithout
about creditScenario
risk remain muted atin
- increase present
Stress NPA by:
100 per 150 per cent
cent
CRAR (%) CRAR (%) CRAR (%)