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Scheme of Presentation
wGlobal Financial Crisis wImpact on India wDifference between US/Europe and India wRBIs Policy Response and Impact wLessons from the Crisis wMedium-term Issues and Challenges
Scheme of Presentation
Global Financial Crisis
wImpact on India wDifference between US/Europe and India wRBIs Policy Response and Impact wLessons from the Crisis wMedium-term Issues and Challenges
Sub-prime lending Originate and distribute model Financial engineering, derivatives Credit rating agencies Lax regulation Large global imbalances Excessively accommodative monetary policy in the US and other advanced economies (2002-04)
w Fundamental cause
n
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
US Monetary policy too loose during 2002-04; aggregate demand exceeded output; large current a/c deficit; mirrored in large surpluses in China and
w Large Fed cuts in 2007: strong boost to oil, other commodity and asset prices
Very large capital flows to EMEs now outflows in 2009 - large volatility - implications for monetary management and financial
April 2008
July 2008 October 2008 April 2009 2008 2009 2008 2009
1.3 1.3 1.7 1.4 1.5 0.5 6.7 6.6 6.9 6.7 6.9 6.1 3.7 3.8 4.1 3.9 3.9 3.0 Global Trade Volume (Goods and Services) 3.7 3.8 4.1 3.9 3.9 3.0
Scheme of Presentation
Impact on India
wDifference between US/Europe and India wRBIs Policy Response and Impact wLessons from the Crisis wMedium-term Issues and Challenges
Period
200708
FIIs (net) External Commercial Borrowings (net) Short-term Trade Credits (net) Total capital flows (net) Memo: Current Account Balance Valuation Gains (+)/Losses (-) on Foreign Exchange Reserves Foreign Exchange Reserves (variation)
200809
31.7
82.0
Scheme of Presentation
wGlobal Financial Crisis wImpact on India Difference between US/Europe and India wRBIs Policy Response and Impact wLessons from the Crisis wMedium-term Issues and Challenges
No subprime No toxic derivatives No bank losses threatening capital No bank credit crunch No mistrust between banks
Temporary impact on MFs/NBFCs (Sept-Oct) Reduction in flow from non-banks Perceptions of credit crunch
Fiscal stress
l l l l
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 3,42,769 3,29,649 2009-10 BE 3,98,552 3,08,647
Gross Net
1,76,453 1,13,000
Differences Between Financial Crisis in US/Europe and India (4) w Indias Approach to Managing Financial Stability (1)
n n
Current account: Full, but gradual opening up Capital account and financial sector: More calibrated approach towards opening up.
l l
Equity flows encouraged; debt flows subject to ceilings and some end-use restrictions. Capital outflows: progressively liberalized.
Financial sector, especially banks, subject to prudential regulation l both liquidity and capital. l prudential limits on banks inter-bank liabilities in relation to their net worth; l asset-liability management guidelines take cognizance of both on and off balance sheet items l Basel II framework: guidelines issued. l Dynamic provisioning l NBFCs: regulation and supervision tightened - to reduce regulatory arbitrage.
Scheme of Presentation
wGlobal Financial Crisis wImpact on India wDifference between US/Europe and India
RBIs Policy Response and Impact
n n n
Reduction in CRR (400 bps) & SLR (100 bps) Special Repo window under LAF for banks onlending to NBFCs, HFCs & MFS Special Refinance to banks without collateral Unwinding of MSS buyback/desequestering OMOs pre-announced calendar
wCut in repo (425 bps) and reverse repo (275 bps) rates.
MSS and CRR good, effective buffers of liquidity both absorption and injection
extension of period for export credit. Expansion in refinance Contracyclical adjustment of prudential norms
Dynamic provisioning
l
w Measures ensuring orderly functioning of Indian financial markets w Cumulative potential primary liquidity impact over Rs. 4,90,000 crore (9 % of GDP) w Comfortable liquidity position since mid-November, 2008 n LAF window in absorption mode. n Call rate within LAF corridor since November 3, 2008 bottom of the corridor. n Gradual reduction in deposit and lending rates of banks . w Government yields: n upward pressure from large market borrowing programme n Proactive management by RBI l MSS unwinding l Enhanced and pre-announced calendar for OMOs
Call market All money markets @ Call market All money markets @ BSE Sensex Rs. Per US $ 10-year G-sec yield Certificate of Deposits Commercial Paper Deposit rate (1-3 yrs)# BPLR#
2 3
Rupees crore 2007-08 2008-09 4,44,807 4,14,902 3,35,698 7,80,505 2,64,138 6,79,040
All commodities Of which: Primary articles Fuel Manufactured products Agricultural labourers Rural labourers
Urban manual employees Industrial
11.4 10.8 (Feb) 11.4 10.8 (Feb) 9.8 9.9 (Feb) 9.7 9.6 (Feb)
non-
workers
Scheme of Presentation
wGlobal Financial Crisis wImpact on India wDifference between US/Europe and India wRBIs Policy Response and Impact
Lessons from the Crisis
Capital buffers, dynamic provisioning Look for regulatory arbitrage incentives/ possibilities
Scheme of Presentation
wGlobal Financial Crisis wImpact on India wDifference between US/Europe and India wRBIs Policy Response and Impact wLessons from the Crisis
Medium-term Issues and Challenges
Medium-term Issues and Challenges (1) Macroeconomic Indicators at a Glance (Per cent)
1 1950-51 to 1965-66 to 1964-65 1980-81 2 3 1980s 4 1990-91 5 1991/92 to 1996-97 6 1997/98 to 2002/03 7 2003/04 To 2007/08 8
1. Real GDP Growth Agriculture Industry Manufacturing Services 2. Real GDCF/GDP 3. ICOR 4. Nominal GDCF/GDP 5. GDS/GDP 6. Saving-Investment Gap
-1.5 -0.7 -1.8 -3.2 -1.2 -0.4 -0.3 w Continuing increase in real GDP growth - Interregnum during the 1970s w Secular uptrend in domestic saving and investment -investment largely financed by domestic savings w Continuation of growth in domestic savings necessary; fiscal prudence
Medium-term Issues and Challenges (3) Fiscal Policy (2) wSustained interest rate differential also connected with the existence of a persistent inflation differential with the rest of the world. n A key challenge is to further reduce inflation expectations toward international levels.
Medium-term Issues and Challenges (6) External Sector (1) w Optimal response to the large and volatile capital flows is a combination of (CGFS, 2009)
n n n n n
n n
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.
External Sector (2) wIndian policy approach to CAL n Distinction between debt and equity flows n Higher inflation and interest rates in India vis-a-vis advanced economies n Liberalisation of debt flows can lead to arbitrage flows n Ceilings on debt flows appropriate
Commercial banks robust l Committee on Financial Sector Assessment (CFSA) Stability Assessment and Stress Testing Concerns about credit risk - remaininmuted at Scenario increase NPA by: presentWithout Stress 100 per cent 150 per cent
Mar-08 Sept 08 CRAR (%) 13.0 12.5 CRAR (%) 11.6 11.1 CRAR (%) 11.0 10.6
n n n
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
Thank You