financial crisis and india ppt @ bec doms bagalkot

Financial Crisis And India

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

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)

Proximate causesSub-prime lendingOriginate and distribute modelFinancial engineering, derivativesCredit rating agenciesLax regulationLarge global imbalancesFundamental causeExcessively accommodative monetary policy in the US and other advanced economies (2002-04)

Global Financial Crisis (2)Current Account Balance (per cent to GDP)

Country 1990-94 1995-99 2000-04 2005 2006 2007 2008China 1.4 1.9 2.4 7.2 9.5 11.0 10.0India -1.3 -1.3 0.5 -1.3 -1.1 -1.0 -2.8Russia 0.9 3.5 11.2 11.0 9.5 5.9 6.1Saudi Arabia -11.7 -2.4 10.6 28.7 27.9 25.1 28.9United Arab Emirates 8.3 4.6 9.9 18.0 22.6 16.1 15.8United States -1.0 -2.1 -4.5 -5.9 -6.0 -5.3 -4.7Memo:Euro area n.a. 0.9 0.4 0.4 0.3 0.2 -0.7Middle East -5.1 1.0 8.4 19.7 21.0 18.2 18.8Source: World Economic Outlook Database, April 2009, International Monetary Fund.

Note: (-) indicates deficit.

Global Financial Crisis (4)US Monetary Policy (1)

•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?


•US Monetary policy too loose during 2002-04; aggregate demand exceeded output; large current a/c deficit; mirrored in large surpluses in China and elsewhere.


Large Fed cuts in 2007: strong boost to oil, other commodity and asset prices

Global Financial Crisis (3)Capital Flows to Emerging Market

Economies

•Very large capital flows to EMEs –– now outflows in 2009 - large volatility - implications for monetary management and financial stability

Global Financial Crisis (7) 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


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

Impact on India (1)Trends in Capital Flows

Component Period 2007-08 2008-09

Foreign Direct Investment to India April-February 27.6 31.7

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 0.5

Total capital flows (net) April- December 82.0 15.3

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 (variation)

April-December 76.1 -53.8

April-March 110.5 -57.7

Impact on India (2)Key Macro Indicators

Indicator Period 2007-08 2008-09

Growth, per cent

Real GDP Growth April-December 9.0 6.9

Industrial production April-February 8.8 2.8

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 (BSE Sensex)

April-March 16,569 12,366

Rs.per US$ April-March 40.24 45.92


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

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) 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


(3) 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

Differences Between Financial Crisis in US/Europe and India (4)

India’s Approach to Managing Financial Stability (1) 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.


(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.


Global Financial Crisis Impact on India Difference between US/Europe

and IndiaRBI’s Policy Response and Impact

Lessons from the Crisis Medium-term Issues and

Challenges

Measures since Mid-September, 2008 (1) 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/desequestering OMOs – pre-announced calendar

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

Measures since Mid-September, 2008 (2)

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


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


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


Impact of Measures (2)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

@: Call money, CBLO and market repo; #: Data pertain to PSBs.


Total Resource Flow from Banks and Non-banks

Rupees crore

Item 2007-08 2008-091 Non-food Bank

credit4,44,807 4,14,902

2 Non-banks 3,35,698 2,64,1383 Total flow of

resources (1+2)7,80,505 6,79,040


Inflation in India (per cent)Item March

2008June 2008 September

2008 December 2008

March 2009

Wholesale price inflationAll commodities 7.8 12.0 12.1 5.9 0.3Of which:Primary articles 9.7 11.0 12.0 11.6 3.5Fuel 6.8 16.3 16.5 -0.7 -6.1Manufactured products

7.3 10.9 10.5 6.2 1.4

Consumer price inflationAgricultural 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 employees

6.0 7.3 9.5 9.8 9.9 (Feb)

Industrial workers 7.9 7.7 9.8 9.7 9.6 (Feb)



and India RBI’s Policy Response and Impact

Lessons from the Crisis

Medium-term Issues and Challenges

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



and India RBI’s Policy Response and Impact Lessons from the Crisis

Medium-term Issues and Challenges

Medium-term Issues and Challenges (1)

Macroeconomic Indicators at a Glance

(Per cent)

1950-51 to

1964-651965-66 to

1980-81 1980s 1990-91

1991/92 to

1996-97

1997/98 to

2002/03

2003/04To

2007/08

1 2 3 4 5 6 7 8

1. Real GDP Growth 4.1 3.2 5.6 5.3 5.7 5.2 8.7

Agriculture 2.9 2.1 4.4 4.0 3.7 0.9 4.4

Industry 6.7 4.2 6.4 5.7 7.0 4.1 8.4

Manufacturing 6.6 3.9 5.8 4.8 7.5 3.9 9.1

Services 4.9 4.2 6.3 5.9 6.4 7.8 10.3

2. Real GDCF/GDP 13.5 19.2 20.2 24.4 22.5 24.1 31.4

3. ICOR 3.3 6.0 3.6 4.6 4.0 4.6 3.6

4. Nominal GDCF/GDP 11.8 16.7 20.8 26.0 23.9 24.5 33.0

5. GDS/GDP 10.3 15.9 19.0 22.8 22.7 24.1 32.7

6. Saving-Investment Gap -1.5 -0.7 -1.8 -3.2 -1.2 -0.4 -0.3 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


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.


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.


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.


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?

to what extent should the capital account influence the exchange rate?

implications of large current account deficits for the real economy?


External Sector (1)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 accountaccumulation 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) Indian policy approach to CAL

Distinction between debt and equity flows

Higher inflation and interest rates in India vis-a-vis advanced economies

Liberalisation of debt flows can lead to arbitrage flows

Ceilings on debt flows appropriate


Financial Sector

Without Stress

Scenario - increase in NPA by:

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

Commercial banks robustCommittee on Financial Sector Assessment

(CFSA)

• Stability Assessment and Stress Testing

• Concerns about credit risk remain muted at present


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

Thank You

financial crisis and india ppt @ bec doms bagalkot

Economy & Finance