The Hindu Business Line : ‘India facing knock-on effect of global crises’

Hyderabad, Dec. 4 The impact of global financial crisis on India is “stronger and longer than expected” and there is a need to weather its negative impact on the domestic economy, according to Dr D. Subba Rao, Governor, Reserve Bank of India.

“India is experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels,” even so the Indian banking system is not directly exposed to the sub-prime mortgage assets, Dr Rao said in his inaugural address at the seminar. “Our financial markets have come under pressure mainly because of what we have begun to call ‘the substitution effect’.

As credit lines and credit channels overseas went dry, some of the credit demand earlier met by overseas financing is shifting to the domestic credit sector, putting pressure on domestic resources. The reversal of capital flows taking place as part of the global de-leveraging process has put pressure on our forex markets, Dr Rao said.

“Together, the global credit crunch and de-leveraging were reflected at home in the sharp fluctuation in the overnight money market rates in October 2008 and the depreciation of the rupee,” he added.

Even as consumption and domestic investment continue to be the key drivers of our growth, India’s integration into the world has been on the increase, he said.

Mixed outlook

The RBI chief indicated a “mixed” outlook for the country. “There is evidence of economic activity slowing down. At the same time, headline inflation, as measured by the wholesale price index, has fallen sharply, and the decline has been sustained for the past three weeks, pointing to a faster than expected reduction in inflation."

"Clearly, falling commodity prices have been the key drivers behind the disinflation; however, some contribution has also come from slowing domestic demand,” he said. – Our Bureau

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