Indian Response To The Financial Crisis

Indian Response To The Financial Crisis –

The major effects of the financial crisis were –

1. Stock Market Crash

2. Depreciation of Indian Rupee due to capital outflow by FIIs

3. Credit Crunch in the Indian Economy following the drastic decline in the liquidity in the bank system.

Monetary Policy Measures –

Indian response to the global financial crisis has been both monetary and fiscal. The RBI took several steps to prevent fast depreciation of Indian rupee by selling billions of dollars in the foreign exchange market from its reserves.

The global financial crisis caused the lack of liquidity problem in the money market which adversely affected the flow of credit to industries.

RBI cut the cash reserve ratio four times from October 2008 to January 2009 by 400 basis points (4% points) from 9% to 5% which infused Rs. 1,60,000 crores in the banking system to increase liquidity.

RBI reduced statutory liquidity ratio (SLR) from 25% to 24% which enabled banks to get 20,000 crores from RBI against Government securities for lending to mutual funds.

Besides, unwinding of some market stabilisation scheme was also undertaken to increase liquidity with the banks. In this way about 2,00,000 crores had been infused into the domestic money market to alleviate the pressure brought on by deterioration in global financial environment. This was expected to boost industrial growth which had slowed in the past few months.

It was felt that to fulfill the needs of credit of the companies, infusion of more liquidity was not enough unless the lending rates of banks were lowered to reduce the cost of borrowing. To achieve this purpose, RBI decreased the repo rates (the rate at which banks borrow from RBI for a short period of time) by 4% point from 9% to 5% in October 2008. As a result of this various banks reduced their prime lending rates to around 12 to 12.5 percent. With lowered lending rates the cost of borrowing fell and more credit was created for investment by the several companies and there was more demand for durable consumer goods such as houses, cars etc.

Reports from banks in March 2009 revealed that through liquidity had eased in the system and banks had lowered the lending rates but credit to industries did not pick up to the extent that was expected. Due to the global meltdown and its adverse effects on various sectors of the Indian economy banks became risk averse and were not willing to lend for fear of defaults by the borrowers.

Fiscal Stimulus –

Recovery of the Indian Economy –

Exports and Foreign Investment –