higher imports. last fiscal, india imported about us $ 150 billion worth of crude which constitutes about 75 per cent of the total annual crude consumption. thus, spillover impact of price volatility of commodity like oil has huge impact on emdes like india. confidence channel 24. the impact of uncertainties of global financial conditions is evident through confidence channel. the first market segment in india to be affected is the equity market. of all markets in india, equity is most accessible to foreign capital. for example, as per one estimate, as of december 2014, foreign portfolio investors ( fpis ) held 23 per cent of the market capitalization and 47 per cent of the floating stock in the equity segment. despite limits on investments fpis have also shown keen interest in taking exposure in debt securities for higher returns. this could prove to be a major source of vulnerability. global risk aversion triggered by the european debt crisis caused a large correction and rapid outflows from indian equity, and more recently debt markets as was evident in the aftermath of taper talk in 2013. when international investors seek safe havens, the exchange rate markets are the next market to be impacted. equity and debt market correction is compounded by capital outflows through demand for foreign currency. a downward spiral can ensue ; thus, threatening overall financial stability. bis central bankers ’ speeches 25. transmission of impact of global crisis is accentuated with domestic vulnerabilities. the impact of may 2013 announcement of the fed reserve was more pronounced due to domestic vulnerabilities. the cad had increased from about one per cent of gdp in 2006 to nearly five per cent in 2013, real exchange rate had appreciated, fiscal deficit and inflation had gone up. the economy had slowed down although the level of foreign reserves was considered comfortable. 26. the confidence channel is also influenced by the credit rating action and outlook. any adverse move by international credit rating agencies affects the borrowing costs of the corporates. it also affects capital flows and the exchange rate. any resultant reversal in capital flows would lead to fall in asset prices and volatility. carry trade channel 27. the “ carry trade ” is the most popular trading strategy in currency markets. traders borrow in currencies with low interest rates and invest in currencies with high interest rates profiting from the margin. prior to the global financial crisis, carry trades in yen and commodity currencies were common. in the recent past, with accommodative

policies of developed countries tend to impact macro - economic parameters of the country, e. g., recent experience of announcement of tapering of asset purchase of the federal reserve. on may 22, 2013, chairman ben bernanke first spoke of the possibility of the tapering of fed ’ s purchases of securities. this and subsequent statements collectively known as ‘ tapering talk ’, had a sharp negative impact on the emerging markets. around the period, domestic concerns pertaining to high cad, moderation in growth, high fiscal deficit, high inflation and policy uncertainty were some of the major concerns for foreign investors. remarks by dr. duvvuri subbarao at the release of reserve bank of india ’ s history volume iv by the then prime minister dr. manmohan singh in new delhi on august 17, 2013. bis central bankers ’ speeches 16. the impact of announcement of tapering and domestic concerns was evident in the form of tightening of liquidity and higher volatility in all market segments along with sharp decline in stock prices. for example, during the period may 22, 2013 & august 30, 2013, the indian rupee depreciated 15. 5 per cent against the us dollar, as against depreciation of 6. 04 per cent of russian rouble, 6. 88 per cent of south african rand and 14. 08 per cent of brazilian real. equity markets declined with sensex declining from closing of 20, 062 on may 22, 2013 to 18, 620 on august 30, 2013. portfolio capital inflows which were buoyant till the third week of may 2013 began retreating as us yield hardened and yield spread narrowed significantly. policy measures taken to curb volatilities 17. reserve bank had stepped in to curb excessive volatility in the foreign exchange market and responded by increasing the short term interest rates and by tightening the rupee liquidity in the system. special swap window was opened for public sector oil marketing companies for meeting crude oil related dollar demand. banks mobilized about us $ 34 billion under fcnr ( b ) scheme and offshore foreign currency borrowings for augmenting the foreign exchange reserves of the country. to ease pressures on rising cad and discourage import of gold, quantitative and other restrictions were placed on gold imports in consultation with the government of india. to further encourage longer term foreign currency inflows, the external commercial borrowing mechanism was rationalized & liberalized and limits for foreign investment in g - sec were streamlined and increased