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. 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. 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.
IIPM - AHMEDABAD 5
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. 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. CONTD…
Large Fed cuts in 2007: strong boost to all other commodity and asset
prices.
Housing prices affected most
IIPM - AHMEDABAD 8
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. 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
IIPM - AHMEDABAD 11
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
IIPM - AHMEDABAD 13
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. 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. 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. 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. 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. 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
IIPM - AHMEDABAD 20
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. 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. 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
IIPM - AHMEDABAD 24
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. 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. 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. 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. 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
IIPM - AHMEDABAD 30
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. 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. 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. 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. 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. 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. 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”.
IIPM - AHMEDABAD 38
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. 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
IIPM - AHMEDABAD 41
