indian central bank - presentation

8/11/2019 Indian Central Bank - Presentation

1/10

Response of the Reserve Bank of India (RBI) to theFinancial and Economic Crisis

Aleksandar Zaklan


2/10

While the Advanced Economies were in Crisis

Already

India enjoyed GDP growth around 9% going into 2008 Main drivers: domestic investment, resulting from savings

rate of about 35% of GDP, and domestic consumption.

However, foreign investment and trade also contributed tothe expansion of the economy

India was integrating into the world economy

Trade share of GDP (exports + imports/GDP) went from 21.2% in1997 to 34.7% by 2008

Foreign capital had been available and cheap and capital inflowsamounted to 9% of GDP by 2008

So in 2007 and going into 2008 the RBI was fightingoverheating rather than crisis


3/10

Ex Ante Measures by the RBI: Interest Rate

Policy

Starting in early 2008 consumer inflationstarted rising towards 10% per year

In addition, a boom was under way in real

estate, in particular in commercial realestate

To maintain price stability the RBI pursueda relatively tight monetary policy, and themain policy rate, the repo rate, was raisedto 9% by the summer of 2008


4/10

Ex Ante Measures by the RBI: Micro and Macro

Prudential Policy

The RBI is also in charge of banking supervision,and 70% of Indias banking system is state-

owned, so the RBI has a lot of control over thesystem

The RBIs governor, Y.V. Reddy, took strong anti-

expansionary regulatory measures:

Banks were not allowed to speculate with land

Banks were forced to maintain conservative lendingstandards for mortgages and consumer loans

The RBI required fairly high capital reserves (12-14%)


5/10

Y. V. Reddy, the anti Greenspan


6/10

With the Lehman Brothers Default the Crisis

Reached India

The second-round effects of the crisis were transmittedboth through the financial and the real channel

Financial channel:

Liquidity dried up as foreign investors divested and put pressure

on the Rupee exchange rate

Domestic companies were cut off from foreign capital and turnedto a tightening domestic credit market

Real channel:

Demand for Indian exports dropped because of the recession inadvanced economies

Remittances from the Gulf region dropped because falling energyprices diminished construction activity there


7/10

Ex Post Measures: Interest rate policy

Starting in the fall of 2008 the actions of the RBIbacame highly expansionary

The repo rate (the rate which RBI charges banks

when they borrow from it) fell from 9% inOctober 2008 to 4.75% currently

The reverse repo rate (the rate the RBI offersbanks for taking in the banksmoney) was cut

from 6% in December 2008 to 3.25% currently


8/10

Ex Post Measures: Aggregate Liquidity Supply

Operations

Ensuring Liquidity supply both in the foreignexchange and the domestic markets was theoverarching goal of the RBIs response to the

crisis

However, no particular emergency measures forspecific banks were needed, since no banks were

threatened by failure.


9/10

Ex Post Measures: Aggregate Liquidity Supply

Operations

Domestic liquidity: The cash reserve ratio (CRR) was decreased from 9% at the end of 2008

to 5% currently

The statutory lending requirement (SLR) was lowered from 25% to 24%of deposits

A number of special financing programs were set up, e.g. guaranteeingcredit to non-banking financial companies (NBFCs) and to micro, smalland medium sized companies (MSMEs)

Foreign exchange liquidity:

The RBI intervened massively in the foreign exchange market by sellingUS dollar reserves to support the Rupee exchange rate

A rupee-dollar swap facility provided liquidity to commercial banks

External borrowing restrictions on corporations were relaxed

Repatriation of remittances was made easier for Indians living abroad


10/10

Conclusion

While the crisis is certainly having an impact, the impacton India is muted compared to what is going on inadvanced economies and other emerging economies, e.g.Eastern Europe

The RBI has taken pretty swift and decisive action againstthe liquidity crunch, and is coordinating its actions withthe fiscal stimulus provided by the government

Overall, the fundamentals of the economy seem to be

sound, and given that the drivers of growth in India arepredominantly domestic, there should not be significantdamage to the countrys medium to long term economic

prospects

indian central bank - presentation

Documents