The document discusses the global financial crisis and its impact on India. It begins by outlining the causes of the crisis, including subprime lending and lax regulation in advanced economies like the US. It then examines the worsening global economic outlook according to IMF forecasts. The document also analyzes the impact of the crisis on India, including reductions in capital flows, stock markets, exports, and foreign exchange reserves. It notes differences between the financial crisis in the US/Europe and in India. Finally, it outlines measures taken by the Reserve Bank of India in response to the crisis, such as expanding rupee liquidity and cutting interest rates.
After a solid and broad-based growth for three consecutive years, the world economy is expected to decelerate in 2007, with the growth of world gross product (WGP) moderating to a pace of 3.2 per cent, down from the estimated 3.8 per cent for 2006. The economy of the United States of America will be the major drag for this global slowdown, as its growth is forecast to soften on the back of a weakening housing market to a rate of 2.2 per cent in 2007. No other developed economy is expected to emerge as an alternative engine for the world economy, as growth in Europe is forecast to slow to around 2 per cent and in Japan to below 2 per cent in 2007. There are, furthermore, substantial downside risks associated with the possibility of a much stronger slowdown of the United States economy.
After a solid and broad-based growth for three consecutive years, the world economy is expected to decelerate in 2007, with the growth of world gross product (WGP) moderating to a pace of 3.2 per cent, down from the estimated 3.8 per cent for 2006. The economy of the United States of America will be the major drag for this global slowdown, as its growth is forecast to soften on the back of a weakening housing market to a rate of 2.2 per cent in 2007. No other developed economy is expected to emerge as an alternative engine for the world economy, as growth in Europe is forecast to slow to around 2 per cent and in Japan to below 2 per cent in 2007. There are, furthermore, substantial downside risks associated with the possibility of a much stronger slowdown of the United States economy.
Government revises its 2009 real GDP growth forecast. The Prime
Minister (PM) announced yesterday that the official real GDP growth
forecast for this year is now between -4% and -5% from +1% to -1%
announced by Bank Negara Malaysia (BNM) in Mar 09. This is due to
the impact of the global recession on external demand which also
weakened domestic demand, especially private investment (1Q09: -
26% YoY), including FDI (1Q09: -50% YoY). However, apart from
mentioning a 25% drop in exports, no detailed breakdown of the
revised forecast was provided.
Brazil, India, Indonesia, South Africa and Turkey. This is the possible list of emerging countries whose currencies could soon be involved into a devastating currency crisis. Perhaps, even more devastating of the big Asian financial crisis of 1997-98. As the US Federal Reserve ends Quantitative Easing and interest rates are near to rise, in fact, fears of a new emerging markets currency crisis arise day after day.
Government revises its 2009 real GDP growth forecast. The Prime
Minister (PM) announced yesterday that the official real GDP growth
forecast for this year is now between -4% and -5% from +1% to -1%
announced by Bank Negara Malaysia (BNM) in Mar 09. This is due to
the impact of the global recession on external demand which also
weakened domestic demand, especially private investment (1Q09: -
26% YoY), including FDI (1Q09: -50% YoY). However, apart from
mentioning a 25% drop in exports, no detailed breakdown of the
revised forecast was provided.
Brazil, India, Indonesia, South Africa and Turkey. This is the possible list of emerging countries whose currencies could soon be involved into a devastating currency crisis. Perhaps, even more devastating of the big Asian financial crisis of 1997-98. As the US Federal Reserve ends Quantitative Easing and interest rates are near to rise, in fact, fears of a new emerging markets currency crisis arise day after day.
The Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.
Financial contagion refers to “the spread of market disturbances -- mostly on the downside -- from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows." Financial contagion can be a potential risk for countries who are trying to integrate their financial system with international financial markets and institutions. It helps explain an economic crisis extending across neighboring countries, or even regions.
“The tipping point is that magic moment when an idea, trend,orsocial behavior crosses a threshold, tips, and spreads
like wildfire.” Malcolm Gladwell, The Tipping Point
The global financial crisis of 2008 is the most severe financial crisis that the world has ever faced since the Great Depression of 1930s.The ‘Financial Crisis of 2008’,also called the US Meltdown has its origin in the US housing sector back in 2001-02,but gradually extended over a period of time and eventually brought the entire world under its grip.And India also get affected by it.In this slides we discussed the major effects
RACHEL ZIEMBA, Director of Central and Eastern Europe, Middle East and Africa and global macroeconomics at Roubini Global Economics - Black Sea Region Amid Global Risks
E-Updates_Apr12—Indian & Global Economic IndicatorsEcofin Surge
Monthly statistical e-bulletin comprising about 30 tables and some charts with the latest available economic/financial market indicators, both Indian and Global.
The Curious Case of Savings-Investment Gap and its Implications for IndiaAshutosh Bhargava
Their has been a remarkable shift in the savings-investment gap at the global level as well as in India. While this has had a tangible impact on global potential growth, the recovery is likely to differ from one country to another. In the Indian context, the recovery in trend growth is likely to be much higher than what is generally peceived and thus requires a more proactive response from policy makers, especially the monetary authorities.
Similar to Global Financial Crisis And India12345678 (20)
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
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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
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4. CONTD…
Fundamental Causes
Excessively accommodative monetary policy in
the US and other advanced economies
(2002-04)
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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.
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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?
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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
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8. CONTD…
Large Fed cuts in 2007: strong boost to all other commodity and asset
prices.
Housing prices affected most
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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
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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. 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
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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. 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
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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
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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
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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
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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
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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
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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. 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
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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
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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
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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. 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
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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.
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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
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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
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@: Call money, CBLO and market repo; #: Data pertain to PSBs.
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)
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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. 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
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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
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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
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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.
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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.
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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.
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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.
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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. 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”.
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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
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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. 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
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