2013 Indian financial crisis

2013 Indian financial crisis
Title	2013 Indian financial crisis
Date	2012–2014
Place	New Delhi, Mumbai, Kolkata
Causes	Current account deficit, Foreign institutional investors, Rupee depreciation
Result	Policy responses by Reserve Bank of India, reform measures by National Democratic Alliance, global market volatility

2013 Indian financial crisis The 2013 Indian financial crisis was a period of acute market stress centered on the Indian rupee, sovereign yields, and capital outflows that affected Bombay Stock Exchange, National Stock Exchange of India, and credit markets. The episode intersected with developments in Federal Reserve policy, Eurozone crisis, and commodity price shifts, prompting responses from the Reserve Bank of India, the Finance Ministry, and state governments.

Background

Prior to 2013, India experienced rapid inflows from Foreign institutional investors and Non-resident Indians, financing a growing current account deficit driven by imports from China and energy purchases from OPEC. Macroeconomic indicators such as Gross domestic product growth and consumer price index trends diverged, while monetary settings at the Reserve Bank of India contrasted with tightening at the Federal Reserve System. Structural issues highlighted by entities like the International Monetary Fund and World Bank included public sector subsidies and fiscal deficits monitored by the CAG.

Causes

Multiple proximate and structural causes converged, including a widening current account deficit exacerbated by high oil imports from Saudi Arabia and United Arab Emirates, slowing industrial production linked to capital investment shortfalls, and policy uncertainties tied to high-profile cases such as the 2G spectrum case and Commonwealth Games controversy. Externally, taper concerns from the Federal Open Market Committee and tightening in United States Treasury securities markets triggered withdrawals by hedge funds and mutual funds based in United States, United Kingdom, and Singapore. Market sentiment was affected by sovereign rating outlooks from agencies like Standard & Poor's, Moody's Investors Service, and Fitch Ratings.

Timeline of key events

- Early 2013: The RBI Governor signals policy divergence while yields on Government bonds rise; Bombay Stock Exchange indices slide amid foreign portfolio investment net outflows. - May–June 2013: Accelerated rupee depreciation versus the United States dollar; intervention by the Reserve Bank of India in foreign exchange markets and hikes in policy rates. - July–August 2013: Volatility peaks with capital controls discussions inside the Finance Ministry and emergency meetings at RBI. High-profile corporate funding squeezes affect firms like Tata Group and Reliance Industries seeking external finance. - Late 2013: Stabilization begins after coordinated measures; bond markets respond to fiscal consolidation signals from the United Progressive Alliance and then the Bharatiya Janata Party campaign period.

Economic impact

The crisis raised yields on Government of India bonds, increased borrowing costs for state governments and public sector banks, and depressed valuations at the Bombay Stock Exchange and National Stock Exchange of India. Sectors tied to imports—such as petrochemicals linked to Indian Oil Corporation and fertilisers tied to Indian Farmers Fertiliser Cooperative—faced margin pressure. The macro shock affected Consumer confidence measures, fixed investment plans of conglomerates like Mahindra Group and Aditya Birla Group, and credit availability at State Bank of India and other banks.

Government and RBI response

The Reserve Bank of India deployed a mix of foreign exchange interventions, tightening of liquidity through open market operations with participation from Securities and Exchange Board of India-regulated entities, and communication policy adjustments by the RBI Governor. The Finance Ministry announced measures to reduce the fiscal deficit including subsidy rationalization proposals and attempts to accelerate Goods and Services Tax momentum. Regulatory steps involved the RBI adjusting limits for Foreign institutional investors and operational rules for External commercial borrowing to manage capital flows. Coordination occurred with bodies like the National Institute of Public Finance and Policy and consultations with international institutions including the International Monetary Fund.

Aftermath and reforms

After the acute phase, policy changes included renewed emphasis on fiscal consolidation, reforms facilitating FDI in select sectors, and structural measures such as land and labor reform debates involving state legislatures like in Gujarat and Maharashtra. The Bharatiya Janata Party-led NDA government elected in 2014 pursued initiatives to attract Foreign direct investment and enacted policy signals affecting Reserve Bank of India independence discussions. Banking sector clean-up efforts targeted non-performing assets at Public sector banks and encouraged consolidation observed in deals involving ICICI Bank and other private lenders.

International effects and market reactions

Global markets including New York Stock Exchange, London Stock Exchange, and Hong Kong Stock Exchange registered spillovers as capital reallocated between emerging markets like Brazil, South Africa, and Turkey. Ratings commentary from Standard & Poor's, Moody's Investors Service, and Fitch Ratings influenced sovereign borrowing spreads, while commodity markets such as those traded at Intercontinental Exchange and Chicago Mercantile Exchange responded to changing demand expectations. International investors in sovereign bond markets adjusted positions in Emerging markets bond index trackers, and multilateral institutions like the World Bank updated outlooks for South Asia.

Category:2013 in India Category:Economic crises