Financial Crisis and Policy Response: Indian Experience G. Gopalakrishna Executive Director Deposit Insurance and Credit Guarantee Corporation (India) 6th DICJ Round Table, Japan March 7-9, 2012
Outline of Presentation Impact of global financial crisis on India Policy Response Exit from policy measures Current Indian economic scenario Present policy approach Global financial crisis & deposit insurance India s deposit insurance system: Features New Initiatives and ongoing challenges 2
Impact of Global Financial Crisis on India - I No direct exposure of banks to toxic assets or failed institutions i i Exposure of their foreign branches/subsidiaries nominal Global l financial i crisis i did not pose major threat to the banking system in India Need for special measures did not arise 3
Impact of Global Financial Crisis on India - II Global meltdown had indirect knock-on effects on the Indian financial markets Equity markets, money markets, forex markets and credit markets came under severe pressure Resultant slowdown in growth Period Growth Rate (%) 2003-0808 9 2009-10 8 2010-11 8.6 2011-12 (1 st quarter) 7.7 2011-12 (2 nd quarter) 6.9 4
Policy Response from Government 3 fiscal stimulus packages between Dec 08 & July 09 ( 3 per cent of GDP) It included: additional public spending capital expenditure / infrastructure spending Cuts in indirect taxes (Central VAT reduced by 4% & Central Excise & Service Tax by 2% each) Additional support to exporters Expanded guarantee cover for credit to micro & small enterprises 5
Policy Response of RBI - I RBI s response aimed at: Containing i the contagion from outside Keeping the domestic money & credit markets functioning i normally Ensuring that liquidity stress does not trigger solvency cascades For this, 3 objectives were targeted: Maintaining comfortable Rupee liquidity Augmenting foreign exchange liquidity Policy framework to keep credit delivery on track to arrest moderation in growth 6
Policy Response of RBI - II Several measures taken by RBI between October 08 and April 09 : Repo Rate reduced by 425 bps to 4.75% Reverse Repo Rate reduced by 275 bps to 3.25% Cash reserve ratio brought down by 400 bps to 5.00% Statutory t t liquidity idit ratio reduced d by 100 bps to 24.00% Enhancement of interest rate ceiling for non resident Indians Export credit refinance limit to commercial banks enhanced from 15% to 50% of outstanding export credit Relaxations in restrictions on end use of ECB funds and cost ceiling 7
Exit from Policy Measures The Reserve Bank began exiting from the crisis driven expansionary policy in October 2009 Between January 2010 and October 2011, the Reserve Bank cumulatively l raised the cash reserve ratio by 100 basis points and the policy rate (repo rate) 13 times by 375 basis points. The monetary policy response was calibrated on the basis of specific growth-inflation i dynamics in India. Monetary policy stance during 2011 was on containing inflation and anchoring inflationary expectations 8
Current Indian Economic Scenario GDP growth estimated at 7% in 2011-12 Inflation moderated from 9.7% during April- Oct. 2011 to 7.5% in December 2011 Fiscal deficit rising Slight decline in capital adequacy and rise in NPAs but Indian banks are robust Systemic liquidity deficit 9
Present Policy Approach The stance of monetary policy has to take into account following factors: While growth outlook has weakened, inflation risks remain Moderation in global growth likely to create financial market stress Current account deficit it is rising i even as capital flows moderate Money market liquidity has tightened 10
Global Financial Crisis & Deposit Insurance Global financial crisis revealed weakness in depositor protection systems Need for redesigning g the safety net framework was felt Deposit insurance systems critical for financial stability Deposit insurance systems need strengthening 11
India s Deposit Insurance System: Features - I DICGC set up in 1962 Second oldest ongoing deposit insurance agency Wholly-owned subsidiary of central bank (RBI) Pay-Box system Mission: To contribute to financial stability by securing public confidence in the banking system through provision of deposit insurance, particularly for the benefit of the small depositors 12
India s Deposit Insurance System: Features - II All commercial banks and eligible co-operative banks covered (2,217 217 banks) Coverage INR 0.1 million per depositor (about US$ 2,240) 93% of number of accounts and 35% of value of deposits covered Coverage stands at 1.6 times per capita GDP Premium charged at flat rate No change in coverage/premium post-global financial crisis 13
New Initiatives & Ongoing Challenges Government has set up Financial Stability Development Council (FSDC) Sub-committee of FSDC headed by RBI Governor Field Test on compliance with Core Principles pointed towards weakness in safety net framework in India Financial Sector Legislative Reforms Commission looking at entire financial sector laws 14
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