Oct 21 2008
Present financial crisis - lessons for India
The ongoing financial crisis wrecking havoc on the US shores in undoubtedly the biggest financial calamity to hit the country since the great depression of 1929. The Wall Street investment giants have crumbled like a pack of cards and the story is not all that rosy with the countries banks too. The financial chaos reigning high in the country has considerably shaken its financial credentials and has not spared the global financial markets. The cost of rescuing these financial investment giants by the US Federal reserve amounts to an astronomical figure of close to a trillion dollars. Believe it or not this figure is almost equivalent to India’s national income. And what is more heartening to know is that the end to this financial turmoil does not seem to be anywhere in the near future. This situation has made economists and financial guru’s in India to take notice and stock up some immediate measures.
The RBI has been continuously pumping in money into the system to enhance liquidity in the market and the banks too have been borrowing easily under LAF which is the Liquidity Adjustment Facility but still liquidity has been drying up. A major factor amounting to this financial situation is the hard hitting taken by industrial economies world over which has subsequently reduced the demand for goods and services. What is noteworthy is the fact that India’s GDP growth estimate for the current fiscal year has been downgraded from 8% to 7.4%. The enormous caution exercised by the RBI and its policies relating to glowing slow on opening new complex financial products has immensely helped in insulating India from drastic effects from the financial crisis.
Taking lessons from the sub prime mortgage and investment crisis which has wrecked the US fundamentals the approach of the RBI was completely cautious on all fronts including permitting hedge funds to invest in Indian equities and real estate, allowing greater FDI in the banking sector or at the same time allowing excessive capital inflows. The present churnings in the global financial sector mainly the investment and banking sector has exposed chinks in the Indian financial sector too in the form of inadequacies within the system to contain losses mainly because of the absence of a healthy and effective risk assessment and management system and to absorb the losses there should be the presence of a strong capital base.