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

, surpassing that of even china and east asia ; and the growth is sourced by an increase in total factor productivity, thereby having positive implications of an enduring nature of the process, rather than being driven only by better returns on capital. the indian economy appears to be shifting to higher levels of growth trajectory in more recent years with the average annual growth of real gdp increasing to 6. 3 per cent during 1992 - 93 to 2005 - 06 from 5. 8 per cent in the 1980s. again, lately, the economy is perhaps picking up an accelerated growth momentum, with an average gdp growth at around 8 per cent per annum during the last three years. it is equally notable that the inflation conditions have moderated to around 5 per cent, decelerating significantly from relatively higher levels in the earlier periods. the strengthening of economic activity in the recent years has been supported by persistent increase in gross domestic investment rates from 23. 0 per cent of gdp in 2001 - 02 to 30. 1 per cent in 2004 - 05 coupled with more efficient use of capital. gross domestic saving rate has also improved from 26. 5 per cent to 29. 1 per cent during the same period. the saving - investment balance in india is in a desirable range thereby contributing to global stability also. facilitated by reforms, financial markets have become freer and institutions more independent operationally. monetary policy has gained more operational autonomy with discontinuation of automatic monetization of deficits since 1997 and reserve bank's withdrawal from primary gilt auctions from this financial year, combined with increasing reliance on indirect instruments. money markets are orderly and stable with participants switching towards more collateralised segments and rates varying generally within a corridor set by the policy stance. government securities markets are now deep and vibrant with varied instruments catering to varied investor perceptions. the foreign exchange market has acquired depth, while the capital markets have become mature in trading procedures, risk management as well as payment and settlement mechanism. india ranks as one of 2 / 7 the three largest emerging markets in terms of stock - market capitalization. there are over 9000 listed companies, out of which about 100 companies have market values of more than us $ 1 billion each. foreign investments span over more than 1, 000 indian companies which is an impressive record. the banking sector has strengthened in recent years in terms of its conformance to sound prudential regulation and governance standards thereby minimising risks, strengthening disclosure and improving operational efficiency. banks are migrating towards basel ii norms and are taking