The deputy governor, Reserve Bank of India (RBI) Rakesh Mohan has said out of 77 reporting banks, 14 reported exposures to Lehman Brothers and its related entities either in India or abroad.
An analysis of the information reported by these banks revealed that majority of the exposures reported by the banks pertained to subsidiaries of Lehman Bros Holdings Inc which are not covered by the bankruptcy proceedings. Overall, these banks? exposure especially to Lehman Brothers Holding Inc which has filed for bankruptcy is not significant and banks are reported to have made adequate provisions.
Rakesh Mohan was speaking on Global Financial Crisis and Key Risks: Impact on India and Asia at IMF-FSF high-level meeting on the Recent Financial Turmoil and Policy Responses at Washington DC on Thursday
According to Mohan India has by-and-large been spared of global financial contagion due to the sub-prime turmoil for a variety of reasons.
India?s growth process has been largely domestic demand driven and its reliance on foreign savings has remained around 1.5 % in recent period.
It also has a very comfortable level of forex reserves. The credit derivatives market is in an embryonic stage; the originate-to-distribute model in India is not comparable to the ones prevailing in advanced markets; there are restrictions on investments by residents in such products issued abroad; and regulatory guidelines on securitisation do not permit immediate profit recognition.
Financial stability in India has been achieved through perseverance of prudential policies which prevent institutions from excessive risk taking, and financial markets from becoming extremely volatile and turbulent, he said.
He further said the daily LAF repo operations have emerged as the primary tool for meeting the liquidity gap in the market. In view of the reversal of capital flows, fresh MSS issuances have been scaled down and there has also been some unwinding of the outstanding MSS balances.
The MSS operates symmetrically and has the flexibility to smoothen liquidity in the banking system both during episodes of capital inflows and outflows. The existing set of monetary instruments has, thus, provided adequate flexibility to manage the evolving situation. In view of this flexibility, unlike central banks in major advanced economies, the RBI did not have to invent new instruments or to dilute the collateral requirements to inject liquidity. LAF repo operations are, however, limited by the excess SLR securities held by banks.
In India, while encouraging foreign investment flows, especially direct investment inflows, a more cautious, nuanced approach has been adopted in regard to debt flows. Debt flows in the form of external commercial borrowings are subject to ceilings and some end-use restrictions, which are modulated from time to time taking into account evolving macroeconomic and monetary conditions
The current account, as measured by the sum of current receipts and current payments, amounted to about 53 per cent of GDP in 2007-08, up from about 19 % of GDP in 1991. Similarly, on the capital account, the sum of gross capital inflows and outflows increased from 12 % of GDP in 1990-91 to around 64 % in 2007-081.
With this degree of openness, developments in international markets are bound to affect the Indian economy and policy makers have to be vigilant in order to minimize the impact of adverse international developments on the domestic economy
Furthermore, in India, complex structures like synthetic securitisation have not been permitted so far. Introduction of such products, when found appropriate, would be guided by the risk management capabilities of the system.