The Global Financial Turmoil and Challenges for the Indian Economy∗
It is my pleasure to be here this evening and to be able to share my thoughts with an
exclusive gathering of bankers. Since this is an in-house meeting and we are professional
colleagues, I propose to be frank and forthright. I am glad to know that the Bankers' Club in
Kolkata has been recently revived and is engaged in promoting professional interaction within
the banking community.
2. The global financial crisis is now the staple of front page news. Banks around the world,
including those in India, are in the forefront of managing the challenge of crisis resolution.
Since it is so topical, I would like to take this opportunity to share my perspective on the
current global turmoil, its impact on India, the outlook for the Indian economy and the
challenges that lie ahead for the Indian banking system, in particular.
Global Financial Outlook
3. The global financial situation continues to be uncertain and unsettled. What started off as a
sub-prime crisis in the US housing mortgage sector has turned successively into a global
banking crisis, global financial crisis and now a global economic crisis. Text book economics
often cites housing as a prime example of a non-tradable good. It is paradoxical that a
quintessentially non-tradable good as housing has triggered a crisis of global dimensions.
This crisis is also the first of a kind in the sense that it is the first financial crisis since the
Great Depression that originated in the advanced economies and rapidly engulfed the whole
world. Such is the depth and sweep of financial globalisation. By far, the most frequently
asked question (FAQ) today is whether the worst – in terms of the financial sector meltdown,
and in particular, failure of financial institutions – is behind us. No one is really willing to take
a definitive call on this, which is a sign of the increasing number of unknown unknowns.
4. Even as recently as six months ago, there was a view th