Thursday, January 10, 2013

where India stands today and what needs to be done

C. Rangarajan, ex- RBI governor and member Rajya Sabha, speaks on where India stands today and what needs to be done

regulatory failure

What stands out glaringly in the current episode is the regulatory failure which was twofold. First, some parts of the financial system were either loosely regulated or were not regulated at all, a factor which led to “regulatory arbitrage” with funds moving more towards the unregulated segments. The second failure lies in the imperfect understanding of the implications of various derivative products. In one sense, derivative products are a natural corollary of financial development. They meet a felt need.

However, if the derivative products become too complex to discern where the risk lies, they become a major source of concern. Rating agencies in the present episode were irresponsible in creating a booming market in suspect derivative products. Quite clearly, there was a mismatch between financial innovation and the ability of the regulators to monitor them. It is ironic that such a regulatory failure should have occurred at a time when intense discussions were being held in Basle and elsewhere to put in place a sound regulatory framework.

impact on india

The Indian financial system is not directly exposed to the ‘toxic’ or ‘distressed’ assets of the developed world. This is not surprising since Indian banks have very few branches abroad. However, the indirect impact on the economy because of the recession abroad is very much there. The ‘de-coupling’ theory does not hold good. The indirect impact is felt both through trade and capital flows. The fall in international commodity prices and more particularly crude oil is reducing sharply the import bill from previous estimates. The recession abroad is having an adverse effect on our exports. There is a sharp desceleration in the rate of growth of exports in 2008-09. The decline in growth rate in exports will affect strongly some sectors where exports constitute a significant proportion of the total production. Some examples are textiles, automobile components and gem and jewellery. In contrast to robust inflow of over $100 billion in 2007-08, 2008-09 may not have seen any net increase in capital flows. With flow of portfolio capital slowing down, Indian firms may also experience difficulties in raising money abroad. All this will impact the exchange rate.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
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