Crisis, trends, and Economic slowdown: a global perspective

Abstract

After few years of stellar GDP growth, Indian economy is now battling with bad loans, depreciating rupee and fiscal burden. The widespread opinion is that the economy fundamentals are strong and that Indian banking system is too big to fail. This report analyses the factors that constitute the economic fundamentals and assess the possibility of a crisis scenario in the country. Macroeconomic theories teach us how to steer fundamental economic parameters in a way that they create a stable economic condition in the country. Despite comprehensive studies and extensive research on this subject, many countries struggle to maintain harmonic economic balance in their countries till date. This non-success in effective management by countries could be attributed to the scale of complexity and the interdependence of economic parameters. Among the financial shocks that shook economies, currency crisis have been a common occurrence in the past that jeopardized economies of many countries of the world. In this report, major currency crisis in the history are analyzed to find major trends and factors which have led to those situations. The objective is to assess the impact of the current India’s macroeconomic outlook by comparing with economic characteristics of a crisis and that will help in foreseeing a possible setback in the near short term. The three major currency crisis that are studied in this report are as follows: 1. Mexican Peso Crisis 1994 2. Asian Financial Crisis 1997 3. Russian Ruble Crisis 1998 Mexico which was just recovering from a Balance-of-payments crisis of 1980s when it had to face a severe currency crisis in 1994. The strong devaluation of peso disturbed Mexican banking industry and a sovereign crisis was closely avoided. In 1994, faced with a steady drain of Forex reserves, Mexico had two options at its disposal • Raise interest rate • Devaluation Since increasing interest rates would lead to slowdown in business and consumer spending, Mexico chose to go down the path of devaluation. But, unfortunately, they weren’t successful in executing the plan. Firstly, they devalued just half of what was expected and suggested by economists. This move increased the speculation in the market which drove the free fall of peso. This fall in peso exploded the dollar debt burden of Mexico. Argentina also faced the brunt of this crisis. In the end, IMF and US Treasury rescued Latin America and financially supported their reform policies.