stimulus measures, advanced economies witnessed significant deterioration in their fiscal position as reflected in high public debt to gdp ratios ( chart 5 ). bis central bankers ’ speeches the contagion from the global financial crisis also warranted swift monetary and fiscal policy responses in emes with a view to ensuring orderly functioning of markets, preserving financial stability, and moderating its adverse effects on growth. they relied first on liquidity augmenting measures – forex liquidity followed by domestic liquidity – and used instruments such as currency swaps and cash reserve ratio before activating policy rates cuts, albeit, from a much higher level. in the process, their policy responses became more synchronised with global efforts. most emerging market central banks conducted outright sales of foreign exchange reserves to help meet the local market ’ s demand for foreign currency funding and to relieve the pressure on the exchange rate. central banks in countries like brazil, korea, mexico and singapore had dollar swap arrangements with the federal reserve. however, it may be noted that although emes undertook several liquidity - easing and foreign exchange measures, their use of credit easing and quantitative easing was more limited ( table 1 ). while both developed economies and emes resorted to conventional and unconventional monetary measures, there were certain differences in terms of their timing, types and magnitudes. first, while in the advanced economies the switchover was from conventional monetary tools to unconventional measures due to policy rates approaching zero, in many emes, unconventional foreign exchange easing and domestic liquidity augmenting measures preceded the conventional measures of policy rate cuts. second, while central banks in bis central bankers ’ speeches emes relied mostly on direct instruments such as reserve requirements to ease domestic liquidity, central banks in advanced countries resorted to various liquidity providing operations through relaxation of counterparties, collaterals and maturity. third, central banks in advanced countries extensively used credit and quantitative easing measures which led to large expansion of their balance sheets. fourth, while in advanced economies fiscal support aimed at rescuing the financial sector from the crisis situation, in emes they were generally meant to address the deficiency in aggregate demand. indian experience until the emergence of the global crisis, the indian economy was passing through a phase of high growth driven by domestic demand – growing domestic investment financed mostly by domestic savings and sustained consumption demand. inflation was also low and stable. sequential financial sector reforms, rule - based fiscal policy and forward looking monetary policy together contributed to the improved macroeconomic performance. india, initially remained somewhat

and deleveraging by banks and financial institutions led to a sharp slowdown in private sector credit growth. equity prices also plunged in the face of heightened uncertainties. the falling equity prices coupled with the deteriorating macroeconomic conditions affected profitability of banks and financial institutions. consequently, the liquidity problem transformed into a solvency problem leading to large scale bank failures in the us and other advanced economies in europe. the attendant wealth loss on account of collapsing asset prices further aggravated the problem in the real sector. the real gdp growth in advanced economies decelerated from 2. 7 per cent in 2007 to 0. 2 per cent in 2008 and subsequently turned negative ( – 3. 4 per cent ) in 2009. transmission to emes initially, it was widely hypothesized that emes would remain insulated from global financial meltdown on the back of the buffer in terms of substantial foreign exchange reserves, improved policy frameworks and generally robust banking sector and corporate balance sheets. however, as the crisis intensified further with the failure of lehman brothers in september 2008 and resulted in heightened risk aversion and global deleveraging, the emes were affected. policy response the international transmission of liquidity shocks was fast and unprecedented. while falling asset prices and uncertainty about valuation of the traded instruments affected market liquidity, failure of leading global financial institutions and the deleveraging process tightened the market for funding liquidity. given the growing risk of illiquidity cascading into solvency problems, the crisis evoked unprecedented policy response, both nationally and internationally. monetary authorities in the advanced economies were the first to resort to aggressive monetary easing first by reducing policy rates and then by using their balance sheets in unconventional ways to augment liquidity. with the financial crisis spreading to the real sector and raising concerns of economic recession, credit and quantitative easing acquired policy priority in most central banks. bis central bankers ’ speeches central banks in advanced countries expanded the pool of securities as well as the number of counter - parties eligible for their central banking operations as well as extended the maturity of those liquidity providing operations. implementation of such unconventional measures led to sharp expansion in the size and composition of their balance sheets ( chart 4 ). the large scale economic downturn accompanying the financial crisis also led to activation of counter - cyclical fiscal policy of unprecedented magnitude. the fiscal measures focused on improving the balance sheet of the financial and corporate sectors as reflected in large scale bailouts in the us and other advanced economies. reflecting such fiscal