Global Financial Crisis And India12345678

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Global Financial Crisis And India12345678

  1. 1. GLOBAL FINANCIAL CRISIS AND INDIA 1 IIPM - AHMEDABAD
  2. 2. FLOW OF PRESENTATION • Global Financial Crisis • Impact on India • Difference between US/Europe and India • RBI’s Policy Response and Impact • Lessons from the Crisis • Medium-term Issues and Challenges • Conclusion IIPM - AHMEDABAD 2
  3. 3. GLOBAL FINANCIAL CRISIS  IMMIDIATE CAUSES i. Sub prime lending ii. Originate and distribute model iii. Financial Engineering iv. Lax regulation v. Large Global imbalance IIPM - AHMEDABAD 3
  4. 4. CONTD…  Fundamental Causes  Excessively accommodative monetary policy in the US and other advanced economies (2002-04) IIPM - AHMEDABAD 4
  5. 5. GLOBAL FINANCIAL CRISIS CURRENT ACCOUNT BALANCE (PER CENT TO GDP) Country 1990-94 1995-99 2000-04 2005 2006 2007 2008 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 Arabia -11.7 -2.4 10.6 28.7 27.9 25.1 28.9 United Arab Emirates 8.3 4.6 9.9 18.0 22.6 16.1 15.8 United States -1.0 -2.1 -4.5 -5.9 -6.0 -5.3 -4.7 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. IIPM - AHMEDABAD 5
  6. 6. US MONETARY POLICY Effective Federal Fund Rate in the US Per cent • Volatility in monetary policy in advanced economies • Large volatility in capital flows to EMEs • Again very loose MP in US – likely surge in capital flows to EMES? IIPM - AHMEDABAD 6
  7. 7. US MONETARY POLICY AND CRISIS • In capital US Monetary policy too loose during 2002-04 aggregate demand exceeded output • Large current a/c. deficit • Mirrored in large surpluses in China and else where IIPM - AHMEDABAD 7
  8. 8. CONTD… Large Fed cuts in 2007: strong boost to all other commodity and asset prices. Housing prices affected most IIPM - AHMEDABAD 8
  9. 9. WORSENING GLOBAL ECONOMIC OUTLET Growth Forecast of IMF (per cent) Region April 2008 July 2008 October 2008 April 2009 2008 2009 2008 2009 2008 2009 2008 2009 Advanced countries 1.3 1.3 1.7 1.4 1.5 0.5 0.9 (-)3.8 EMEs 6.7 6.6 6.9 6.7 6.9 6.1 6.1 1.6 World 3.7 3.8 4.1 3.9 3.9 3.0 3.2 (-)1.3 Global Trade Volume (Goods and Services) World 3.7 3.8 4.1 3.9 3.9 3.0 3.3 -11.0 IIPM - AHMEDABAD 9
  10. 10. GLOBAL FINANCIAL CRISIS WORSENING GLOBAL ECONOMIC OUTLOOK Growth Forecast of IMF (per cent) Region April 2008 July 2008 October 2008 April 2009 2008 2009 2008 2009 2008 2009 2008 2009 Advanced countries 1.3 1.3 1.7 1.4 1.5 0.5 0.9 (-)3.8 EMEs 6.7 6.6 6.9 6.7 6.9 6.1 6.1 1.6 World 3.7 3.8 4.1 3.9 3.9 3.0 3.2 (-)1.3 Global Trade Volume (Goods and Services) World 3.7 3.8 4.1 3.9 3.9 3.0 3.3 -11.0
  11. 11. SCHEME OF PRESENTATION • Global Financial Crisis Impact on India • Difference between US/Europe and India • RBI’s Policy Response and Impact • Lessons from the Crisis • Medium-term Issues and Challenges IIPM - AHMEDABAD 11
  12. 12. IMPACT ON INDIA TRENDS IN CAPITAL FLOWS(%) Component Period 2007-08 2008-09 Foreign Direct Investment to India April-February 27.6 31.65 FIIs (net) April-March 20.3 -15.0 External Commercial Borrowings (net) April- December 17.5 6.0 Short-term Trade Credits (net) April- December 10.7 0.6 Total capital flows (net) April- December 76.1 23.25 Memo: Current Account Balance April- December -15.5 -36.5 Valuation Gains (+)/Losses (-) on Foreign Exchange Reserves April- December 9.0 -33.4 Foreign Exchange Reserves April-December 76.1 -53.8 (variation) April-March 110.5 -57.7
  13. 13. IMPACT ON INDIA KEY MACRO INDICATORS Indicator Period 2007-08(in %) 2008-09(in %) Real GDP April-December 9.0 6.9 Growth Industrial April-February 8.8 2.8 production Services April-December 10.5 9.7 Exports April-March 28.4 6.4 Imports April-March 40.2 17.9 GFD/GDP April-March 2.7 6.0 Stock Market April-March 16,569 12,366 (BSE Sensex) Rs.per US$ April-March 40.24 45.92 IIPM - AHMEDABAD 13
  14. 14. SCHEME OF PRESENTATION • Global Financial Crisis • Impact on India Difference between US/Europe and India • RBI’s Policy Response and Impact • Lessons from the Crisis • Medium-term Issues and Challenges IIPM - AHMEDABAD 14
  15. 15. DIFFERENCES BETWEEN FINANCIAL CRISIS IN US/EUROPE AND INDIA • What has not happened here • No subprime • No toxic derivatives • No bank losses threatening capital • No bank credit crunch • No mistrust between banks IIPM - AHMEDABAD 15
  16. 16. DIFFERENCES BETWEEN FINANCIAL CRISIS IN US/EUROPE AND INDIA • Our Problems • Reduction in capital flows • Pressure on BOP • Stock markets • Monetary and liquidity impact Temporary impact on MFs/NBFCs (Sept-Oct) Reduction in flow from non-banks Perceptions of credit crunch IIPM - AHMEDABAD 16
  17. 17. DIFFERENCES BETWEEN FINANCIAL CRISIS IN US/EUROPE AND INDIA • Our Problems • Fiscal stress • Oil, Fertiliser, Food subsidies • Pay Commission, Debt waiver, NRE • Stimulus packages • GFD/GDP ratio: 5.5-6.0% Large increase in market borrowings Rs. crore 2008-09 BE 2008-09 RE 2009-10 BE Gross 1,76,453 3,42,769 3,98,552 Net 1,13,000 3,29,649 3,08,647 17 IIPM - AHMEDABAD
  18. 18. DIFFERENCES BETWEEN FINANCIAL CRISIS IN US/EUROPE AND INDIA • India’s Approach to Managing Financial Stability • Current account: Full, but gradual opening up • Capital account and financial sector: More calibrated approach towards opening up. • Equity flows encouraged; • debt flows subject to ceilings and some end-use restrictions. • Capital outflows: progressively liberalized. 18 IIPM - AHMEDABAD
  19. 19. DIFFERENCES BETWEEN FINANCIAL CRISIS IN US/EUROPE AND INDIA • India’s Approach to Managing Financial Stability • 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. IIPM - AHMEDABAD 19
  20. 20. SCHEME OF PRESENTATION • Global Financial Crisis • Impact on India • Difference between US/Europe and India RBI’s Policy Response and Impact • Lessons from the Crisis • Medium-term Issues and Challenges IIPM - AHMEDABAD 20
  21. 21. MEASURES SINCE MID-SEPTEMBER, 2008 • Expanding rupee liquidity • Reduction in CRR (400 bps) & SLR (100 bps) • Special Repo window under LAF for banks on-lending to NBFCs, HFCs & MFS • Special Refinance to banks without collateral • Unwinding of MSS – buyback/ de sequestering • OMOs – pre-announced calendar IIPM - AHMEDABAD 21
  22. 22. CONTD… • Cut in repo (425 bps) and reverse repo (275 bps) rates. • Existing instruments – enough flexibility • MSS and CRR – good, effective buffers of liquidity – both absorption and injection IIPM - AHMEDABAD 22
  23. 23. MEASURES SINCE MID-SEPTEMBER, 2008 • Managing Forex liquidity • NRE and FCNR(B) deposits: interest rate ceilings raised • ECB norms relaxed • Allowing corporates to buy back FCCBs • Rupee-dollar swap facility for banks with overseas branches IIPM - AHMEDABAD 23
  24. 24. MEASURES SINCE MID-SEPTEMBER, 2008 • Encouraging Flow of credit •Exporters: • extension of period for export credit. • Expansion in refinance •Dynamic provisioning • Contra cyclical adjustment of prudential norms • SIDBI and NHB: lendable resources expanded • Loan restructuring IIPM - AHMEDABAD 24
  25. 25. MEASURES SINCE MID-SEPTEMBER, 2008 IMPACT OF MEASURES • Measures ensuring orderly functioning of Indian financial markets • Cumulative potential primary liquidity impact – over Rs. 4,90,002 crore (9 % of GDP) • Comfortable liquidity position since mid-November, 2008 • Call rate within LAF corridor since November 4, 2008 – bottom of the corridor. IIPM - AHMEDABAD 25
  26. 26. CONTD… • Gradual reduction in deposit and lending rates of banks • Government yields: • upward pressure from large market borrowing programmed • Proactive management by RBI • MSS unwinding • Enhanced and pre-announced calendar for OMOs IIPM - AHMEDABAD 26
  27. 27. MEASURES SINCE MID-SEPTEMBER, 2008 IMPACT OF MEASURES Item March 2008 September 2008 October 2008 March 2009 Turnover (Rupees crore, average daily) 1 Call market 11,182 11,690 14,497 11,909 2 All money markets @ 63,395 42,891 40,906 81,821 Key Interest Rates (per cent) 3 Call market 7.37 10.52 9.90 4.17 4 All money markets @ 6.55 9.26 8.66 3.76 5 BSE Sensex 15946 13943 10550 8995 6 Rs. Per US $ 40.36 45.56 48.64 51.23 7 10-year G-sec yield 7.69 8.45 7.85 6.56 8 Certificate of Deposits 10.0 11.6 10.0 7.0 9 Commercial Paper 10.4 12.3 14.7 8.9 10 Deposit rate (1-3 yrs)# 8.25-9.25 8.75-10.25 8.75-10.25 8.00-9.25 11 BPLR# 12.25-13.50 13.75-14.75 13.75-14.75 11.50-14.00 IIPM - AHMEDABAD 27 @: Call money, CBLO and market repo; #: Data pertain to PSBs.
  28. 28. MEASURES SINCE MID-SEPTEMBER, 2008 TOTAL RESOURCE FLOW FROM BANKS AND NON- BANKS Rupees crore Item 2007-08 2008-09 1 Non-food Bank credit 4,44,807 4,14,902 2 Non-banks 3,35,698 2,64,138 3 Total flow of resources 7,80,505 6,79,040 (1+2) IIPM - AHMEDABAD 28
  29. 29. MEASURES SINCE MID-SEPTEMBER, 2008 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 labourers 7.9 8.8 11.0 11.4 10.8 (Feb) 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)
  30. 30. SCHEME OF PRESENTATION • Global Financial Crisis • Impact on India • Difference between US/Europe and India • RBI’s Policy Response and Impact Lessons from the Crisis • Medium-term Issues and Challenges IIPM - AHMEDABAD 30
  31. 31. 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 • Look for regulatory arbitrage incentives/ possibilities IIPM - AHMEDABAD 31
  32. 32. SCHEME OF PRESENTATION • Global Financial Crisis • Impact on India • Difference between US/Europe and India • RBI’s Policy Response and Impact • Lessons from the Crisis Medium-term Issues and Challenges IIPM - AHMEDABAD 32
  33. 33. MACRO ECO…  Continuing increase in real GDP growth - Interregnum during the 1970s.  Secular uptrend in domestic saving and investment -investment largely financed by domestic savings  Continuation of growth in domestic savings necessary; fiscal prudence. IIPM - AHMEDABAD 33
  34. 34. MEDIUM-TERM ISSUES AND CHALLENGES FISCAL POLICY • Combined fiscal deficit in India • Even before the recent setback: very high by international standards • contribute to the persistence of an interest rate differential with the rest of the world, • constrains progress towards full capital account convertibility. • self imposed rule based fiscal correction needs to be consolidated and carried forward. IIPM - AHMEDABAD 34
  35. 35. MEDIUM-TERM ISSUES AND CHALLENGES FISCAL POLICY • Sustained interest rate differential also connected with the existence of a persistent inflation differential with the rest of the world. • A key challenge is to further reduce inflation expectations toward international levels. IIPM - AHMEDABAD 35
  36. 36. MEDIUM-TERM ISSUES AND CHALLENGES MONETARY POLICY • A continuous need to adapt monetary management to the emerging needs of a fast growing and increasingly open economy. • Financial deepening and increasing monetization. • expansion of monetary aggregates departs from their traditional relationship with real GDP growth. • manage such growth without endangering price or financial stability. IIPM - AHMEDABAD 36
  37. 37. MEDIUM-TERM ISSUES AND CHALLENGES MONETARY POLICY • Further development of financial markets • Large capital inflows in recent years • Reserve Bank’s ability to manage the impossible trinity • Issues for monetary policy • current account balance as a good guide to evaluation of the appropriate level of an exchange rate? • to what extent should the capital account influence the exchange rate?IIPM - AHMEDABAD 37
  38. 38. MEDIUM-TERM ISSUES AND CHALLENGES EXTERNAL SECTOR • 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 • development of resilient domestic financial markets • combination is country-specific; no “one size fits all”. IIPM - AHMEDABAD 38
  39. 39. MEDIUM-TERM ISSUES AND CHALLENGES EXTERNAL SECTOR • Indian policy approach to CAL • Distinction between debt and equity flows • Higher inflation and interest rates in India vis-a-vis advanced economies • Liberalization of debt flows can lead to arbitrage flows • Ceilings on debt flows appropriate IIPM - AHMEDABAD 39
  40. 40. MEDIUM-TERM ISSUES AND CHALLENGES FINANCIAL SECTOR  Commercial banks robust  Committee on Financial Sector Assessment (CFSA) •Stability Assessment and Stress Testing •Concerns about credit risk remain muted at present Scenario - increase in NPA by: Without Stress 100 per cent 150 per cent CRAR (%) CRAR (%) CRAR (%) Mar-08 13.0 11.6 11.0 Sept–08 12.5 11.1 10.6 •Note: CRAR = credit to risk-weighted assets ratio
  41. 41. MEDIUM-TERM ISSUES AND CHALLENGES CONCLUSION • India’s fundamentals remain strong • Financial sector robust • Monetary policy – sufficient instruments, flexible • Corporate sector not too leveraged – second round of restructuring going on – productivity gains • Foreign direct investment buoyant • Agriculture improving • Growth domestically financed Indian economy should be able to recover fast and return to 9%+ growth path IIPM - AHMEDABAD 41
  42. 42. Any Questions: jontymohta444@gmail.com IIPM - AHMEDABAD 42

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