shyamala gopinath : some reflections on the recent global financial turmoil – an indian perspective keynote address by ms shyamala gopinath, deputy governor of the reserve bank of india, at the annual conference of the foreign exchange dealers ’ association of india ( fedai ), kolkata, 10 january 2009. assistance of mr. vaibhav chaturvedi in preparation of the remarks is gratefully acknowledged. * * * every year, this forum provides an opportunity to collectively review and analyse the developments of the past year in the forex market. but the past year has been like never before and now the focus is on the impact of the financial crisis on the real economy. the financial meltdown has resulted in effective nationalisation of major financial institutions in the us, uk and eurozone. so far global banks, mortgage lenders and insurance firms have announced write downs of over us $ 800 billion. there has been a massive increase in central bank lending to the banking system and rescue packages totalling almost us $ 3 trillion have been announced by governments around the world. monetary policy has been eased aggressively but given the lagged impact attention has shifted to fiscal policy. from this side, i can say that the past year has indeed been a challenging one which has reinforced the futility of finding clean corner solutions to evolving situations and each decision necessarily involves managing different objectives while finding the immediate focus points without dissipating the gains of reforms undertaken. forex markets in india – recent developments 2. as far as the indian foreign exchange market is concerned, during the last five years the sources of supply and demand have changed significantly with large transactions emanating from capital account unlike in the past when current account transactions dominated the foreign exchange market. the behaviour as well as the incentive structure of the participants who use the forex market for undertaking current account transactions differ significantly from those who use the market for capital account transactions. therefore managing the capital account, particularly debt flows, even while we are getting more integrated is an important instrument in our overall macroeconomic management. in the last few years we had to address the challenge of large capital inflows and had therefore in consultation with government taken certain measures to calibrate these flows by requiring external commercial borrowings ( ecb ) to be used for foreign currency expenditure. measures to liberalise outflows for resident individuals, mutual funds, and corporates were also pursued. the global financial crisis and deleveraging have now led to reversal and

of crises on institutions. in 2000, the bank of spain introduced a dynamic, rules - based loan - loss provisioning system in which provisions increase in periods of higher credit growth and economic expansion, and decrease in times of low or negative growth, thereby contributing to smooth income and capital over time. rbi also did something similar when we increased the risk weight as also the general provisioning requirement on exposures to sectors which showed high credit growth. this was reduced recently when growth moderated. ( vi ) the increasing focus on holistic approach towards regulation of financial entities is a welcome change from the view that allowed a growing proportion of products and participants to go unregulated on the grounds that they had no systematic impact. this approach resulted in the shadow banking system made up of unregulated sivs and conduits distributing opaque structured products containing risky assets with the active marketing of rating agencies. in india also, one view used to be that only deposit taking nbfcs need regulation to protect the interest of depositors and that the non - deposit taking nbfcs do not pose any such risk and therefore need not be regulated. it was, however, realised that the inter - linkages of these nbfcs with the other components of the financial system have grown over the years and their growing presence in various financial markets could, in the absence of regulatory steps lead to risk transfers which could have systemic implications. you are well aware how in the recent past, through a gradual non - disruptive process, an attempt has been made to bring systemically important non - deposit taking nbfcs under a more harmonised regulatory framework, including the capital adequacy norms and exposure norms. these measures have reduced the unlimited leverage possibilities available to nbfcs. ( vii ) another important aspect has been the treatment of off balance sheet exposures and consolidation of off balance sheet vehicles and conduits. while applying prudential norms, there is need to treat off - balance sheet transactions similar to on balance sheet transactions for the purpose of capital adequacy norms and risk management. in the case of off balance sheet vehicles a broader view needs to be taken from a prudential point of view on consolidation. the critical issue should be not merely the ownership but where the risk resides. in this context, a review of the current conversion factors and risk weights for off balance sheet items is necessary. similarly it is recognized that the potential liquidity risks also need to be captured. pursuant to