Financial Sector Reforms and the Role of Central Bank in India: A Post-Global Financial Crisis Perspective

Abstract

The very basis of this paper is to visualize and analyze the major role played by the Indian Central Bank in withstanding the storm of the economic downturn due to its persistent reformative efforts. The factual matrix of all major economies world over clearly depicts that there has been a sharp decline in the finances, and most of the strong economies have been under immense pressure to close down or reduce their financial operations to a considerable extent as they could not withstand the unforeseen crises in the past two years. The repercussion of this global slowdown has had a bearing on a fast developing country like India too. During the year 2008-09, India's economic growth decelerated to 6.7 per cent. This represented an overall decline of2. I per cent from the average growth rate of 8.8 per cent in the previous five years (2003-04 to 2007-08) (Economic Survey, 2008- 09). The global financial crisis and consequent economic recession in developed economics have clearly been a major factor in India's economic slowdown. Given the gravity of the crisis in the advanced countries, which some have called the worst since the Great Depression of I 930s, every developing country has suffered to a varying degree. No country, including India, remained immune to the crisis. However, there had been a minimal impact of this global financial crisis on the Indian banking and financial system, primarily because of the reason that the Indian Banks had very limited exposure to riskier assets and derivatives. The relatively low presence of foreign banks also minimized the impact on the domestic economy. All commercial banks met the minimum capital adequacy norms of9 per cent (while the minimum capital adequacy requirement under the Basel Standards is 8 per cent) and throughout the crisis period, inter-bank markets for money, forex and debt functioned smoothly. The sudden spurt of the sub-prime mortgage sector in the USA in 2007 was the result of two important fundamental macroeconomic imbalances that persisted for too long. One was the loose monetary policy of the Federal Reserve in the Greenspan era, which had its role in supporting the growth of the two most unpleasant things- speculation and leverage- which in turn contained the potential for a severe financial crisis and secondly, the growing global imbalances. The global imbalances were manifested through a substantial increase in current account deficit of the US, mirrored by the substantial surplus in Asia, particularly in China and in oil-exporting countries of the Middle East and Russia. Countries around the world with current account surpluses or large foreign exchange reserves kept investing in the United States. Despite the crisis and the resultant forces correction in imbalances, this global problem persisted even after the crisis (RBI Bulletin, October, 2009).