. the degree to which property - backed lending had distorted the banks ’ balance sheets meant that placing a credible bound on potential future losses was hard : the potential for tail risks to generate losses that might be unaffordable for the exchequer to cover could not be convincingly ruled out. when a huge block of government - guaranteed banking debt matured in september, the banks required much more central bank refinancing ; not surprisingly, the ecb also began to focus on the irish outlook with increased concern. talk of default in many quarters added to market anxiety and an outflow of deposits resumed, with about €100 billion ( almost three - quarters of that year ’ s gnp ) leaving in the course of the year, the bulk of it in the last five months, and a good segment financed by emergency liquidity assistance. with the deauville agreement ( on future eu policy with regard to sovereign creditor haircuts ) casting further doubt on the sovereign ’ s ability to continue to underpin both the continuing part of the banking guarantee and its bond issuance, irish credit spreads moved out to unsustainable - looking levels. 1 from the combination of all these factors, by early november, it was clear that the protection of an official programme would be needed to enable the government ’ s spending programme ( which by then had been revised to deliver a convergent path for the public finances ) to be maintained. changing terms of government debt in the programme as initially agreed, the programme disappointed the irish negotiators in a number of dimensions, especially the rate of interest and the other side ’ s inability to factor in the banking risks in a way that would break the pernicious link between the sovereign and the deauville came just after the market had relaxed following the build - up of uncertainty with the big guaranteed bank debt repayments at end - september. to be sure, the post - deauville impact on spreads was not as large as spread movements that were seen later in the euro crisis, but it was enough to move ireland very much into the danger zone. bis central bankers ’ speeches banks, a link which continued to inhibit the funding of both. had the stress test of 2011 obliged the government to inject as much as €35 billion into the banks ( as was pencilled - in by the troika staff ) – more than twice the figure finally struck in march 2011 – the sustainability of the government ’ s debt profile would have been even weaker.

cent in the crisis year ( 2008 – 09 ) and registered a negative growth of 3. 5 per cent in 2009 – 10. output growth, which averaged little less than 9 per cent in the previous five years and 9. 5 per cent during the three year period 2005 – 08, dropped to 6. 8 per cent in the crisis year ( 2008 – 09 ). in the pre - crisis years, capital inflows were far in excess of the current account deficit ( cad ) and the reserve bank had to absorb these flows in its balance sheet. as global investors tried to rebalance their portfolios during the crisis period, the country witnessed large capital outflows immediately after the collapse of lehman brothers leading to a downward pressure on the rupee. the exchange rate depreciated from rs. 39. 37 per dollar in january 2008 to rs. 51. 23 per dollar in march 2009. bis central bankers ’ speeches the credit markets also came under pressure as corporates, finding it difficult to raise resources through external sources of funding, turned to domestic bank and non - bank institutions for funding and also withdrew their investments from the liquid schemes of mutual funds. this, in turn, put redemption pressure on mutual funds ( mfs ) and, further along the chain, on non - banking financial companies ( nbfcs ) for whom mfs were a significant source of funding. the indian banking sector has, however, withstood the spillover effects of the global financial crisis as was evident in the robust crar and tier 1 crar which remained far above the stipulated regulatory minimum of 9 per cent. the asset quality was also comfortable despite some slippages. by end march 2010, the gross npa ratio stood at 2. 50 per cent ( net npa 1. 13 % ) while the crar was 13. 58 per cent. the spillover effects of the crisis were, however, most visible in the credit growth of banking sector. since september 2008, the growth rate of advances, as also of assets, started witnessing a declining trend which continued for almost one year up to september 2009. the y - o - y growth in advances fell from 28. 5 per cent at the end march 2007 to 12. 3 per cent by end sept 2009 while the y - o - y growth in assets fell from 22. 9 per cent to 15. 1 per cent during the same period. d. policy response – india given the deceleration in growth and drying up of