GEC presentation

Slide 1: 

Global Financial Crisis: and Its impact on India

Scheme of Presentation : 

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

Global Financial Crisis (1) : 

Global Financial Crisis (1) Proximate causes Sub-prime lending Originate and distribute model Financial engineering, derivatives Credit rating agencies Large global imbalances Fundamental cause Excessively accommodative monetary policy in the US and other advanced economies (2002-04)

Impact on India (1)Trends in Capital Flows : 

Impact on India (1)Trends in Capital Flows

Differences Between Financial Crisis in US/Europe and India (1) : 

Differences Between Financial Crisis in US/Europe and India (1) What has not happened here No subprime No toxic derivatives No bank losses threatening capital No bank credit crunch No mistrust between banks

Differences Between Financial Crisis in US/Europe and India (2) : 

Differences Between Financial Crisis in US/Europe and India (2) 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

Differences Between Financial Crisis in US/Europe and India (3) : 

Differences Between Financial Crisis in US/Europe and India (3) Our Problems Fiscal stress Oil, Fertiliser, Food subsidies Pay Commission, Debt waiver Stimulus packages GFD/GDP ratio: 5.5-6.0% Large increase in market borrowings

Differences Between Financial Crisis in US/Europe and India (5) : 

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.

Measures since Mid-September, 2008 (1) : 

Measures since Mid-September, 2008 (1) Expanding rupee liquidity Reduction in CRR (400 bps) & SLR (100 bps) Special Repo window under LAF(liqudity adjustment facilities) for banks on-lending to NBFCs, HFCs & MFS Special Refinance to banks without collateral OMOs – pre-announced calendar Cut in repo (425 bps) and reverse repo (275 bps) rates. Existing instruments – enough flexibility CRR – good, effective buffers of liquidity – both absorption and injection

Measures since Mid-September, 2008 (2) : 

Measures since Mid-September, 2008 (2) Managing Forex liquidity NRE(non recurring engineering) and FCNR(foreign currency non residential a/c)) deposits: interest rate ceilings raised ECB(european central bank) norms relaxed Allowing corporate to buy back FCCBs(foreign currencycertificate bond0 Rupee-dollar swap facility for banks with overseas branches

Measures since Mid-September, 2008 (3) : 

Measures since Mid-September, 2008 (3) Encouraging Flow of credit Exporters: extension of 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 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 Proactive management by RBI MSS unwinding Enhanced and pre-announced calendar for OMOs

Measures since Mid-September, 2008 (5)Impact of Measures (2) : 

Measures since Mid-September, 2008 (5)Impact of Measures (2)

Measures since Mid-September, 2008 (6)Total Resource Flow from Banks and Non-banks : 

Measures since Mid-September, 2008 (6)Total Resource Flow from Banks and Non-banks

Lessons from the Crisis : 

Lessons from the Crisis Avoid high volatility in monetary policy Appropriate response of monetary policy to asset prices Manage capital flow volatility Look for signs of over leveraging Active dynamic financial regulation Capital buffers, dynamic provisioning Look for regulatory arbitrage incentives/ possibilities

Medium-term Issues and Challenges (2)Fiscal Policy (1) : 

Medium-term Issues and Challenges (2)Fiscal Policy (1) 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.

Medium-term Issues and Challenges (3)Fiscal Policy (2) : 

Medium-term Issues and Challenges (3)Fiscal Policy (2) 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.

Medium-term Issues and Challenges (4)Monetary Policy (1) : 

Medium-term Issues and Challenges (4)Monetary Policy (1) A continuous need to adapt monetary management to the emerging needs of a fast growing and increasingly open economy. Financial deepening and increasing monetisation. expansion of monetary aggregates departs from their traditional relationship with real GDP growth. task of monetary management: manage such growth without endangering price or financial stability.

Medium-term Issues and Challenges (5)Monetary Policy (2) : 

Medium-term Issues and Challenges (5)Monetary Policy (2) 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?

Medium-term Issues and Challenges (8)Financial Sector : 

Medium-term Issues and Challenges (8)Financial Sector Note: CRAR = credit to risk-weighted assets ratio Commercial banks robust Committee on Financial Sector Assessment (CFSA) Stability Assessment and Stress Testing Concerns about credit risk remain muted at present

Medium-term Issues and Challenges (9)Conclusion : 

Medium-term Issues and Challenges (9)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

Slide 22: 

Thank You