Indian financial sector and the global financial crisis

Abstract

Though the Indian financial sector had very limited exposure to the toxic assets at the heart of the global financial crisis, it suffered a severe liquidity crisis after the Lehman bankruptcy. This liquidity crisis could have been averted with timely injection of liquidity into the system by the Reserve Bank of India, claims Jayanth Varma. Apart from the liquidity crisis, India also had to deal with the collapse of global trade finance; deflation of an asset market bubble; demand contraction for exports; and corporate losses on currency derivatives. Looking ahead, the paper argues that the crisis is a wake-up call for the Indian banks and financial system for better managing their liquidity and credit risks, re-examining the international expansion policies of banks, and reviewing risk management models and stress test methodologies.