account flows plus gross capital flows ) to gdp, this ratio has increased from 46. 8 per cent in 1997 - 98 to 117. 4 per cent in 2007 - 08. these numbers are clear evidence of india's increasing integration into the world economy over the last 10 years. we must also note another important difference between the crisis in the advanced countries and the developments in india. while in the advanced countries the contagion spread from the financial to the real sector, in india, the slowdown in the real sector is affecting the financial sector, which in turn, has a second - order impact on the real sector. the indian banking system the indian banking system is not directly exposed to the sub - prime mortgage assets. it has very limited indirect exposure to the us mortgage market, or to the failed institutions or stressed assets. indian banks, both in the public sector and in the private sector, are financially sound, well capitalised and well regulated. the average capital to risk - weighted assets ratio ( crar ) for the indian banking system, as at end - march 2008, was 12. 6 per cent, as against the regulatory minimum of nine per cent and the basel norm of eight per cent. even so, india is experiencing the knock - on effects of the global crisis, through the monetary, financial and real channels – all of which are coming on top of the already expected cyclical moderation in growth. our financial markets – equity market, money market, forex market and credit market – have all come under pressure mainly because of what we have begun to call “ the substitution effect ” of : ( i ) drying up of overseas financing for indian banks and indian corporates ; ( ii ) constraints in raising funds in a bearish domestic capital market ; and ( iii ) decline in the internal accruals of the corporates. all these factors added to the pressure on the domestic credit market. simultaneously, the reversal of capital flows, caused by the global de - leveraging process, has put pressure on our forex market. the sharp fluctuation in the overnight money market rates in october 2008 and the depreciation of the rupee reflected the combined impact of the global credit crunch and the de - leveraging process underway. outlook for india the outlook for india, going forward, is mixed. there is evidence of a slow down in the economic activity. the real gdp growth has moderated in the first half of 2008 - 09. industrial activity, particularly in the manufacturing

with the other members of the financial stability council if needed. under these conditions, we think a normalization of the global monetary stance is a welcome and necessary development and we believe we are in a good position to face it. krishnamurthy and vissing ‐ jorgenson ( 2013 ). bis central bankers ’ speeches nonetheless, these are not times to be complacent. there are various issues and risks to be aware of. first, a prolonged persistence of the global liquidity conditions could result in sustained capital inflows to emerging economies. this may fuel vulnerabilities to a point where they become dangerous, especially now that the reduced growth prospects in emerging economies may channel new capital inflows towards consumption rather than to investment. second, as i mentioned before, a volatile exit from quantitative easing is a relevant risk scenario. market reactions to the announcements of future tapering have been relatively moderate so far. but the actual tapering has not yet begun, and there is considerable uncertainty about its exact timing and consequences. on this front we are still in unchartered territory. finally, i am concerned about a potential interaction between the financial uncertainty associated with the tapering program and the political uncertainty about fiscal negotiations in the us in the coming months. to close our conference, tomorrow we will have a policy panel where three distinguished economists : guillermo calvo, vittorio corbo, and maurice obstfeld, will share their thoughts on the end of qe and its consequences for emerging markets. we have navigated through challenging times in recent years. the decisive action of policymakers worldwide has spared the global economy from further trouble. in many cases policy has had to go ahead of research. but we should take time to think hard about these events ; their causes ; their mechanisms ; and the benefits and costs of the policies being implemented. this will allow us to finish the course and to derive important lessons for the future. i am confident that the discussion of the next two days will help us advance toward this goal. i would like to finish this presentation by thanking claudio raddatz, diego saravia, and jaume ventura for putting together an exciting program and all of you for coming to participate and share in the discussion. thank you references bianchi, j. ( 2011 ) “ overborrowing and systemic externalities in the business cycle, ” american economic review, american economic association, vol. 101 ( 7 ), pp. 3400 – 3426, december 2011