financial crisis and india ppt @ bec doms bagalkot
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Financial crisis and india ppt @ bec doms bagalkotTRANSCRIPT
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Financial Crisis And India
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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
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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
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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)
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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.
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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?
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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.
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Global Financial Crisis (6)US Monetary Policy (3)
Large Fed cuts in 2007: strong boost to oil, other commodity and asset prices
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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Scheme of Presentation
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
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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
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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
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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
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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
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Measures since Mid-September, 2008 (5)
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.
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Measures since Mid-September, 2008 (6)
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
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Measures since Mid-September, 2008 (7)
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)
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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
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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
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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
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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
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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.
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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.
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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.
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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?
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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 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”.
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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
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Medium-term Issues and Challenges (8)
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
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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
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Thank You