turned out to be active partners in finding meaningful resolution mechanisms to a global problem. iii. impact and policy responses in india why was india impacted? in the initial phase of the crisis, the impact on the indian financial markets was rather muted as the direct exposure of banks to subprime assets was negligible. nonetheless, india could not remain unscathed for long. as the crisis intensified in the aftermath of collapse of lehman brothers, the global shocks first impacted the domestic financial markets and then transmitted to the real economy through the finance, trade and confidence channels. this could be attributed to the global nature of the current crisis on the one hand and accelerated trade and financial integration of the indian economy with the world since the 1990s. consequently, there has been a shift in the degree of synchronisation of the indian trade and business cycles with the global cycles, which along with increased financial integration in the recent period indicate that india cannot remain immune to global trends. thus, global economic developments now have a greater influence on the domestic economy ( mohanty, 2009 ). how was india impacted? post - lehman, the impact of the global financial crisis was first felt through reversal of capital flows and fall in equity prices in the domestic stock markets on the back of large scale sell - off by the foreign institutional investors ( fiis ) as a part of the global deleveraging process. simultaneously, there was reduced access to external sources of funding by indian entities due to the tightening of credit conditions in international markets. this shortage of dollar liquidity put significant pressures on the domestic foreign exchange market, which was reflected in downward pressures on the indian rupee along with its increased volatility. simultaneously, there was a substitution of overseas financing by domestic financing, which brought both money market and credit market under pressure. the transmission of this external demand shocks was swift and severe on india ’ s export growth, which turned negative in october 2008. imports too started declining by december 2008 as domestic activity slowed. the overall impact was reflected in a fall in investment demand and sharp deceleration in the growth of indian economy in the second half of 2008 – 09 which persisted through the first quarter of 2009 – 10. policy response in order to limit the adverse impact of the contagion on the indian financial markets and the broader economy, the reserve bank, like most other central banks, took a number of conventional and unconventional measures. these included augmenting domestic and foreign exchange liquidity and sharp reduction in the policy rates

on the self - correcting nature of financial markets. the debate on the role of finance in economic growth has again come to the centre stage. against this backdrop, i will reflect on the following set of questions. how similar or different is the recent crisis from the past crises in terms of its cause and manifestation? how did policies in different countries respond to the crisis? how and why was india impacted and how did we respond? what are the key lessons from the crisis? i will conclude with a focus on india. i. genesis of the crisis the crisis was an outcome of the interplay between both macroeconomic and microeconomic factors. from a macroeconomic perspective, the crisis has been attributed to the persistence of global imbalances, excessively accommodative monetary policy pursued in major advanced economies and lack of recognition of asset prices in policy formulation. from a microeconomic perspective, the crisis has been attributed to the rapid financial innovations without adequate regulation, credit boom and the lowering of credit standards, inadequate corporate governance and inappropriate incentive system in the financial sector and overall lax oversight of the financial system. global imbalances it is argued that while the subprime problem was the trigger, the root cause of the crisis lies in the persistence of the global imbalances since the start of the current decade ( bis, 2009 ). large current account deficits in the advanced countries mirrored by large current account surpluses in the emerging market economies ( emes ) implied that excess saving flowed uphill from developing countries to developed countries ( chart 1 and table 1 ). bernanke ( 2005 ) considered this “ saving glut ” as one of the factors leading to the crisis. among the advanced countries, it is the us which has a large saving - investment gap. among the emes, it is china, which has the largest saving surplus. the causation, however, is not very clear : whether it is excess saving in china or excess consumption in the us that contributed to the crisis. apart from the saving - investment imbalances, there has been concurrent accumulation of large foreign exchange reserves by the emes, particularly china, also as self insurance against sudden reversal of capital flows ( table 2 ). it is argued that accumulation of reserves, particularly from trade surplus, resulted in misalignment of exchange rates. this prevented the global imbalances to adjust. moreover, the burden of adjustment was borne disproportionately by countries with flexible curre