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India

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GLOBAL FINANCE CRISIS The global financial crisis of 2008 is the

worst of its kind since the Great Depression

Began with failures of large financialinstitutions in the United StatesMorgan Stanley, Goldman Sachs, Merrill Lynch Deutsche Bank

,Barclays.

Rapidly evolved into a global crisis resulting in a number of European bank failures

And still looms around in the form of euro zone debt crises.

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MEANING OF GLOBAL FINANCIAL

CRISIS The term financial crisis is applied broadly to

a variety of situations Usually, some financial institutions or assetssuddenly lose a large part of their value

Banking Panics (and recessions) Stock market crashes Bursting of financial bubbles and giant

organizations

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In the year 2006 RBS paid $100 billion for ABN Amro.In 2007 For this amount it could buy:

1. Citibank $22.5 billion2. Morgan Stanley $10.5 billion3. Goldman Sachs $21 billion4. Merrill Lynch $12.3 billion

5. Deutsche Bank $13 billion6. Barclays $12.7 billionAnd still have $8 billion change......with which it would be able topick up GM, Ford, Chrysler and the Honda F1 Teams .

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GDP of India has risen rapidly since 1991

A map showing the global distributionof Indian exports

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Our problems Reduction in capital flow

1. pressure on BPO.2. Stock markets3. Momentary and liquidity impact

Temporary impact on MFs , NBFCs.

Reduction in cash flow from non-banks sector. Perception of credit crunch

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Our problems Fiscal stress

1. Oil, Fertiliser, Food subsidies2. Pay Commission, Debt waiver, NRE3. Stimulus packages4. GFD/GDP ratio: 5.5-6.0%

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Indias Approach to Managing

Financial Stability Financial sector, especially banks, subject to prudential

regulation1. both liquidity and capital. 2. prudential limits on banks inter -bank liabilities in

relation to their net worth.3. asset-liability management guidelines take

cognizance of both on and off balance sheetitems

4. Base II framework: guidelines issued. 5. Dynamic provisioning

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Indias Approach to ManagingFinancial Stability Capital account and financial sector: More calibrated

approach towards opening up. Equity flows encouraged;debt flows subject to ceilings and some end-userestrictions.

Capital outflows: progressively liberalized.

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Indias Approach to Managing

Financial Stability Encouraging Flow of credit

Exporters:extension of period for export credit.Expansion in refinance

Dynamic provisioning Contra cyclical adjustment of prudential norms

Loan restructuring

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INDIAN ECONOMY INDICATORS

REPO RATE 6.5% REVERSE REPO RATE 5.0%

CASH RESERVE RATIO 5.5% STATUTORY LIQUIDITY RATIO 24% PRIME LENDING RATE 12.5% SAVINGS BANK RATE 3.5% GDP 8.5% INFLATION 6.9%

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11 December2007 Crossed20,000 mark

07 February 2006Crossed 10,000 mark30 December 1999

Crossed 5,000 mark

11 th December 2007Crossed 20,000 mark.

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What did not happen in India

No subprime

No toxic derivatives

No bank losses threatening capital No mistrust between banks

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Lessons from the Crisis

Avoid high volatility in monetary policy Appropriate response of monetary policy to

asset prices Manage capital flow volatility Active dynamic financial regulation

Capital buffers, dynamic provisioning

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