Global Financial Crisis

					 Global Financial Crisis:
Causes, Consequences and
    India’s Prospects
           By
   RAKESH MOHAN
    Deputy Governor
  Reserve Bank of 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
        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)

 Proximate causes
     Sub-prime lending
     Originate and distribute model
     Financial engineering, derivatives
     Credit rating agencies
     Lax regulation
     Large global imbalances
 Fundamental cause
     Excessively 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    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.
                   Global Financial Crisis (4)
                      US Monetary Policy (1)
               9
               8
               7     Effective Federal Fund Rate in the US
               6
    Per cent




               5
               4
               3
               2
               1
               0   May-97




                   May-08
                   Dec-90




                   Dec-01
                    Jan-90




                    Jan-01
                   Mar-99
                   Nov-91
                   Oct-92

                   Aug-94

                    Jun-96

                   Apr-98




                   Nov-02
                   Oct-03

                   Aug-05

                    Jun-07
                   Sep-93




                   Feb-00




                   Sep-04
                     Jul-95




                     Jul-06
•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?
             Global Financial Crisis (5)
                   US Monetary Policy (2)




•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.
             Global Financial Crisis (6)
                 US Monetary Policy (3)




 Large Fed cuts in 2007: strong boost to oil, other
  commodity and asset prices
                                        Global Financial Crisis (3)
                         Capital Flows to Emerging Market Economies
                  800

                  600

                  400
   US $ billion




                  200

                     0
                         1980

                                1982

                                       1984

                                              1986

                                                     1988

                                                            1990

                                                                   1992

                                                                          1994

                                                                                 1996

                                                                                        1998

                                                                                               2000

                                                                                                      2002

                                                                                                             2004

                                                                                                                    2006

                                                                                                                           2008
                  -200

                  -400

                  -600
                    Direct investment, net                                 Private portfolio flows, net
                    Other private capital flows, net                       Private capital flows, net

•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
        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
                       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            April-December        76.1      -53.8
(variation)
                                     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         April-March        16,569            12,366
(BSE Sensex)
Rs.per US$           April-March         40.24             45.92
       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
 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
 Differences Between Financial Crisis in
     US/Europe and India (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.
 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.
       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
   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
      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 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)
      Item                      March          September       October       March
                                2008           2008            2008          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.
     Measures since Mid-September, 2008 (6)
     Total Resource Flow from Banks and Non-banks

                                   Rupees crore
    Item                  2007-08   2008-09
1
    Non-food Bank           4,44,807 4,14,902
    credit
2
    Non-banks               3,35,698     2,64,138
3
    Total flow of           7,80,505     6,79,040
    resources (1+2)
            Measures since Mid-September, 2008 (7)
                                     Inflation in India
                                                                     (per cent)
Item                 March          June 2008 September December    March
                     2008                     2008      2008        2009
                             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                  7.9         8.8      11.0      11.4 10.8 (Feb)
labourers
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)
       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
           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
       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
                  Medium-term Issues and Challenges (1)
                  Macroeconomic Indicators at a Glance (Per cent)
                                                                                     2003/04
                           1950-51   1965-66                     1991/92   1997/98
                                                                                          To
                                to        to                          to        to
                                                                                     2007/08
                           1964-65   1980-81   1980s   1990-91   1996-97   2002/03
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
  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)
 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)
 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)
 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?
       Medium-term Issues and Challenges (6)
                   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 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”.
   Medium-term Issues and Challenges (7)
             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
            Medium-term Issues and Challenges (8)
                     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
   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
Thank You

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:1
posted:6/23/2013
language:English
pages:40
vivien renata vivien renata
About