Indian Financial System

This case study was written by B Sravana Kumar, IBSCDC, under the direction of D Satish, IBS Hyderabad.
It is intended to be used as the basis for

class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published
sources.
2011, IBSCDC.
No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of
the copyright owner.

Indian Financial System
Facilitated by reforms, financial markets have become freer and institutions more independent
operationally.
Dr. Y.V.Reddy, Governor, Reserve Bank of India
1
Financial reforms of the 1990s were initiated with an objective to eliminate the financial despotism
and create an efficient, productive and profitable financial sector. The Economic reforms best
describe the post-1991 consequences of various economic practices, as it ushered in substantial
transformation and liberalization of the Indian financial system.
In November 2009, India purchased 200 tonnes of gold valued at Rs $6.7 billion (Rs31,380 crore)
from the International Monetary Fund(IMF)
2
. RBI bought nearly half of the gold sold by IMF
under the latters limited gold sales programme. By purchasing the gold, RBI now has more gold
than the European Central Bank, thus becoming the 11
th
largest gold holder among various Central
Banks, marking a remarkable turnaround from the crisis of 1991, when India had to airlift its gold
to pledge for a loan. In 1991, when India faced its worst ever balance of payment (BoP) crisis, it
had no alternative but to pledge 67 tonnes of gold to the Union Bank of Switzerland and Bank of
England to raise a loan of $605 million. It intended to shore up its dwindling foreign exchange
reserves, which were at a low of $1.2 billion in January 1991. Foreign exchange reserves of the
country in November 2009 were at $285.5 billion with foreign currency assets accounting for
$268.3 billion, followed by gold for $10.3 billon, and SDRs
3
for $5,267 million; the reserve
position in the IMF is $1,589 million to see Annexure I for foreign exchange reserves). India has
emerged from a country which pledged its gold to one that bought gold to shore up its foreign
exchange reserves.
Since the BoP crisis of 1991, the process of liberalization and globalization has seen a series of
steps undertaken, especially in banking and financial sectors. This had a favorable impact on the
overall growth of the economy and brought resilience in economy too. In the past two decades,

1
Dr. Y.V. Reddy, former Governor of Reserve Bank of India, at the 12
th
International Conference on The
Future of Asia The Road to an Asian Community- Concepts and Prospects, organized by Nihon
Keizai Shimbun, Inc(Nikkei) in Tokyo on May 25, 2006
2 IMF UN specialized agency established in 1944 under Bretton Woods system.
3 SDRs Special Drawing Rights an international reserve asset, created by the IMF in 1969 to supplement
its member countries' official reserves
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2
Indian economy performed extraordinarily well and withstood even the most severe global
financial crisis of 2008, while rest of the global economies were sent into a tailspin. The resilience
in the Indian financial system is due to the policy framework modeled to formulate the structure of
Indian banks and financial institutions, prepared with wise regulations and meticulous supervision
of the Reserve Bank of India (RBI) and the Government of India (GoI). India has emerged from a
country which pledged its gold to one that bought gold to shore up its foreign exchange reserves.
Financial System during the Pre-Liberalized Period
The Indian financial system after independence followed an inward looking strategy with the state
assuming an important role for more than four decades. During 1950s, 1960s and 1970s the
financial system was over-controlled and rigid, highly interventionist, consequently
entrepreneurship was heavily constrained. Import substituting industrialization was deemed to be
the major engine of growth and implemented through a highly restrictive trade regime
characterized by import licensing, quantitative restrictions and high tariffs.
The primary emphasis was on increasing the domestic savings rate by suppressing consumption,
high taxation, and by appropriating profits through public ownership of commercial enterprises
and heavy industries. The public ownership had a substantial presence in industries such as steel,
fertilizers, chemicals, machine tools and infrastructure. Later, the state-owned enterprises were
given monopoly positions in banking, insurance and bulk consumer goods sectors. Alongside this
public sector dominance, the country followed a system of stringent controls on private economic
activity, implemented through an investment-licensing regime that dictated choice of scale and
technology.
By the late 1970s and 1980s, it became obvious that the strategy of public sector dominance was
overmanned and inefficient; controls over the private sector had also greatly impeded economic
efficiency and growth of the country. Although, the inward looking policy of the government did
not result in any significant acceleration in the economic growth; it laid a strong foundation for
industrialization between 1956 and 1966, resulting in high industrial growth. The Indian economy,
during the first three decades of independence, grew at an average annual rate of 3.5% (to see
Annexure II). In terms of per capita income, the growth was a mere 1.4% per annum. The average
annual growth rate was lower when compared to the developing world, including the Sub-Saharan
Africa. (to see Annexure III)
Prior to financial reforms (in pre-1990 era), Indian government had assumed that the generation of
public saving could be used for higher levels of investment. On the contrary, instead of being a
generator of savings, the public sector became a consumer of communitys savings. The
Government began borrowing not only to meet its own revenue expenditure but also to finance
public sector investments. Later, in the early 1980s to encourage business, attempts were made to
shift from direct physical controls to indirect financial incentives, which gathered momentum in
the Indian economy.
Although the growth rate of Indian economy accelerated to more than 5%, the fiscal expansion
was unsustainable, as by mid-1980s, Indias fiscal deficit
4
rose (to see Annexure IV)
from 7.5 % of GDP in 19891990 to 9.4 % in 19901991. Total external debt more than tripled,
from $19 billion in 1980 to $69 billion in 1990, with debt to private creditors rising tenfold (from
$2.4 billion to $25 billion) and short-term debt rising fivefold (from $0.9 billion to $4.5 billion)
5
.

4
Fiscal Deficit: When a government's total expenditures exceed the revenue that it generates (excluding
money from borrowings). The difference between the total expenditure of the government by way of
revenue, capital and loans (net of repayments) and revenue receipts and capital receipts which are not in
nature of borrowing but which, finally accrue to the government.
5
Dani Rodrik and Arvind Subramanian, Hindu Growth to Productivity Surge: The Mystery of the Indian
Growth Transition, IMF Working Paper, May 2004
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3
The rise in the fiscal deficit represented not merely the excess of government investment over its
saving, but also borrowing to finance current expenditure that yielded no financial return. The total
expenditure of the central government increased from 16.23% of GDP to 19.26% during 198590.
This was mainly due to the increase in non-plan expenditure
6
, which climbed from 9.26% of GDP
during 198085 to 12.62% during 198590. This increase was due to an increase on account of
interest payment, defense expenditure and agricultural subsidies.
The continued rise in fiscal expenditure and borrowings from internal and external sources of
funds resulted in rising debt service commitments leading to deterioration of the current account
situation. The Gulf Crisis of 1990 too contributed to the large current account deficit in 199091.
The fall in exports to US (Indias largest export destination), and the collapse of the Soviet Union
(Indias major trading partner), further deteriorated the current account deficit resulting in a severe
balance of payment crisis in 1991(to see Annexure V, Balance of payment indicators). An
increased dependence on foreign oil imports (to see Annexure VI, Indias Foreign Trade),
vulnerability to oil price fluctuations, declining remittances from abroad, strong domestic demand,
deteriorating fiscal balances and raising interest payments on external debt contributed to inflation
rising to 13% and forex reserves declining to cover less than two weeks of imports. The
government faced serious difficulties in rolling over of short term credit which was of around US $
5 billion. Under these circumstances, India had to approach the IMF for loan and pledge its gold
reserves. The country resorted to post-crisis adjustment programme featured at macroeconomic
stabilization and structural reforms.
Structural Reforms in Indian Financial Sector
Policy makers in India responded to the 1991 crisis by undertaking a series of stabilization and
structured reforms that dramatically reversed the previous policy framework followed in the
country.
The Stabilization Policies
The stabilization component in the 90s was aimed at reducing the balance of payment deficit. The
steps were towards reducing the rate of fiscal growth, monetary tightening and curbing the excess
demand on Indian foreign exchange reserves, which was supported by devaluation of India
currency.
The focus of structural reforms was on external sector reforms. Import licenses for most items
were abolished, tariffs reduced, quantitative restrictions on imports were completely phased out by
2001 and Foreign Direct Investments (FDIs) were actively encouraged. Later, structural reforms
shifted to tax reforms, further trade liberalization and financial sector reforms, disinvestment, and
privatization policies for attracting FDIs. Similarly, financial markets were liberalized with an aim
to remove financial repression, improving efficiency, productivity and profitability, allowing
market forces to determine the interest rates, providing operational and functional autonomy to
institutions and opening the sector for international players.
Following the recommendations of the Committee on the Financial System (CFS), which
submitted its report in November 1991 (to see Annexure VII and Annexure VIII), the government
moved towards globalization of Indian financial system by bringing reforms into the banking
sector, government securities market, foreign exchange, and the capital markets.

6
Non-Plan Expenditure: government expenditure can be classified into plan and non-plan expenditures.
Plan expenditure refers to expenditure incurred planned projects and programmes. Non-Plan expenditure
covers all expenditure incurred by the government not included in the plan.
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4
Reforms in the Banking Sector
During the early 1970s and 1980s, monetary policy had become almost non-existent. India
followed a system of credit allocation, administered and differential interest rates for different
purposes and automatic monetization of fiscal deficit
7
. Also, financial repression was through pre-
emption of banks resources both in terms of the statutory holding of Government Securities
(Statutory Liquidity Ratio
8
(SLR) and Cash Reserve Ratio
9
(CRR)). These mechanisms distorted
the interest rate mechanism and adversely affected the profitability of the banks by the end of 1980
and also their viability. The average returns on assets in the second half of the 1980s was only
about 0.15%, while capital and reserves averaged about 1.5% of assets. The banks did not follow
global accounting standards and by the end 199293, non-performing assets (NPAs) of 27 public
sector banks amounted to 24% of total credit and half of the public sector banks faced negative net
worth.
Reforms in the banking sector were aimed at bringing in international best practices in a phased
manner in the areas of capital adequacy requirement
10
, accounting, income recognition and
provisions for risk exposure. Rather than privatizing the public sector banks, they were allowed to
increase capital by disinvesting up to 49% of the paid-up capital. Banks were also allowed to go
for public listing. This was designed to bring in greater transparency through enhanced disclosure
norms. To enhance competition among banks, new private sector banks were allowed to enter the
market and restrictions on the number of foreign bank branches were removed. Tight capital
adequacy, prudential and supervision norms were applied equally to all banks, regardless of
ownership.
In consonance with the Narasimham Committee-I (1991) and Narasimham CommitteeII (1998)
11
,
major reforms were brought in the areas of operational flexibility and financial autonomy in the
banking sector in order to enhance their efficiency, productivity and profitability.
The reforms in early 1990s aimed at elimination of automatic monetization
12
, reduction of the
CRR and SLR, interest rate deregulation and entry deregulation and adoption of prudential norms.
Further, in April, 1992 the RBI issued guidelines for income recognition, asset classification and
provisioning, and also adopted the Basel Accord
13
for capital adequacy standards. The government
also established the Board of Financial Supervision in the RBI and recapitalized public-sector
banks in order to give banks sufficient financial strength and to enable them to gain access to
capital markets. In 1993, the RBI permitted private entry into the banking sector and at the same

7
Mohan, R. (2006): Economic Reforms in India: Where are We and Where do We Go? RBI Bulletin,
December 2006
8
SLR: Statutory Liquidity Ratio is the percentage of deposits the bank has to maintain in form of gold,
cash or other approved securities.
9
CRR: Cash Reserve Ratio is a central bank regulation that sets the minimum reserves each commercial
bank must hold out of customer deposits and notes. If Central bank (RBI) decides to increase the percent
of this, the available amount with the banks comes down. Central Bank us this method (increase of CRR
rate), to drain out the excessive money from the banks.
10
Capital Adequacy Ratio: (CAR) It is ratio of capital fund to risk weighted assets expressed in percentage terms.
11
Constituted in 1991, -RBI proposed the committee chaired by M. Narasimham former RBI Governor to
review the Financial System. The Committee submitted two reports, in 1992 and 1998, which laid
significant thrust on enhancing the efficiency and viability of thrust on enhancing the efficiency and
viability of the banking sector.
12
Automatic Monetization: Central Bank financing the Government Deficit financing through issuing
treasury bills.
13
Basel Accord: A set of agreements set by the Basel Committee on Bank Supervision, which provides
recommendations on banking regulations in regard to capital risk, market risk and operational risk.
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5
time prohibited cross-holding practices with industrial groups
14
. As a major step towards
enhancing competition, FDI in the private sector banks was allowed up to 74%. And also, for
enabling private shareholding in public sector banks, the government shareholding was limited to
51%. Banks were allowed to diversify into various financial services and offer a whole range of
financial products. The Clearing Corporation of India Limited (CCIL) was also set up to act as a
central counterparty for facilitating payments and settlement systems related to trade in foreign
exchange, government securities and other debt instruments.
The banking sector reforms started in the early 1990s essentially followed a two-pronged
approach. Firstly, it introduced international best practices in the banking system and the level of
competition was gradually increased within the banking system. Special emphasis was place on
building risk management system, while measures were initiated to ensure flexibility and
operational autonomy in the Indian banking sector. Secondly, measures were taken to improve the
legal framework and technological system. (to see Annexure IX for major institutional and legal
measure in the banking sector and Annexure X for major reforms in Banking Sector)
Deregulation of Lending Rates and BPLR
Till late 1980s, lending rates and allocation of bank credit were closely regulated by the RBI. With
the initiation of financial sector reforms, steps were taken to regulate the lending rates of
commercial banks. The credit limit size classes of scheduled commercial banks, on which
administered rates were prescribed, were reduced into three slabs in April 1993. Prior to 1990 six
slabs existed and was later reduced to four in the year 1992. The slabs or credit limit size class
under the revised guidelines consisted of three categories: (i) advance up to and inclusive of Rs.
25,000; (ii) advance over Rs. 25,000 and up to Rs. 2 lakh; and (iii) advance over Rs. 2 lakh
15
.
In a major step towards deregulation of lending rates, it was decided in October 1994 that banks
would determine their own lending rates for credit limits over Rs.2 lakh in accordance with their
risk-reward perception and commercial judgment. At the same time banks were required to declare
their Prime Lending Rate (PLR), the rate charged for the prime borrowers of the bank, with the
approval of their boards taking into account their cost of funds, transaction cost, etc. To bring in
transparency and for better utilization of bank credit and gain better control over credit flow RBI
introduced a loan system of delivery of bank credit in April 1995, whereby the banks were given
the freedom to charge interest rate on the cash credit and loan components with reference to the
PLR approved by their Boards. Further, in February 1997, in order to encourage borrowers to
switch to loan delivery system, banks were allowed to prescribe separate PLRs and spreads (over
PLRs) for both loan and cash credit components. In October 1997 it was made mandatory for
banks, to announce the maximum spread over the PLR for all advances other than consumer credit
while announcing the PLR. Banks were also given freedom to announce separate Prime Term
Lending Rate (PTLR), with regard to term loans of 3 years and above. RBI in April 1999 Tenor-
linked Prime Lending Rates (TPLRs) was introduced in April 1999 to provide banks with freedom
to operate different PLRs for different maturities, provided the transparency and uniformity of
treatment that were envisaged under the PLR system was also maintained. The Benchmark Prime
Lending Rate (BPLR) was introduced with aim of introducing transparency and ensuring
appropriate pricing of loans, wherein the lending rate truly reflects the actual costs. The BPLR was
computed after taking into consideration the cost of funds, operational expenses and a minimum
margin to cover regulatory requirement of provisioning and capital charge, and profit margin
16.

14
Sayuri Shirai, Assessing the Impact of Financial and Capital Market Reforms on Firms Corporate
Financing Patterns in India, South Asia Economic Journal, September, 2004 vol. 5 no.2189-208.
15
http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=565
16
http://www.sify.com/finance/how-the-benchmark-prime-lending-rate-works-news-bank-kcpr1Hjgcaj.html
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6
However, due to competition, banks have been offering loans to first class borrowers with high
credit rating at rates much below the BPLR in a non-transparent manner. RBI opines that banks
lending at sub-BPLR rates are not in tune with the Central banks objective of bringing
transparency to the loan rates. BPLR fell short of RBIs expectations to work as a reference rate or
benchmark rate. In order to make loan pricing transparent, BPLR was replaced with base rate
17
.
The base rate would be computed after taking into account all costs, including the cost of deposits,
the negative carry on CRR and SLR, overheads and employee expenses. Banks cannot lend to any
category of borrowers below the base rate with effect from July 1, 2010. (to see Annexure XI for
Evolution of BPLR in India)
Prudential Regulation
One of the most important components of prudential regulation of banks is the maintenance of
minimum capital ratios. The Basel Committee on Banking Regulation and Supervisory
Practices,1988 known as Basel I, appointed by the Bank of International Settlements
18
(BIS)
recommended adoption of a common capital adequacy standard known as the Cook Ratio
19
.
For the purpose of calculation capital, BIS classifies capital into two broad categories Tier I
capital, constituting share capital and disclosed reserves and Tier II capital, consisting of
undisclosed and latent reserves, general provision, hybrid capital and subordinated debt. BIS
recommends that Tier II capital must not exceed Tier I capital. The Capital to Risk Asset Ratio
(CRAR)
20
suggested by BIS in 1992 was 8%, i.e., Tier I and Tier II capital
21
should be equal to
minimum of 8% of the total assets of the bank. Basel I proposals forced the bank to look at
credit risk and regulatory capital more closely than they had done earlier. Subsequently, some
weaknesses in Basel I framework came up and the Basel committee finally came up with
International Convergence of Capital Measurement and Capital Standards: A Revised
Framework, popularly known as Basel II in June 2004. Basel II rests on three pillars, Pillar I
minimum capital requirements, Pillar II supervisory reviews, and Pillar III market
discipline. The RBI had announced in its annual policy statement in May 2004 that banks in
India should examine in depth the options available under Basel II and draw a road-map by
end-December 2004 for migration to Basel II. Banks have also been advised to formulate and
operationalize the Capital Adequacy Assessment Process (CAAP) within the banks as required
under Pillar II of the New Framework.

17
RBI constituted a working committee under the Chairmanship of Deepak Mohanty in 2009, to examine
the related issues of BPLR and suggest a transparent credit pricing mechanism with an objective to
ensure effective transmission of the Monetary Policy signals from time to time. The Working Group
suggested Base rate in the place of existing BPLR, which is arrived, duly taking into consideration the
cost of deposits/funds, negative carry in respect of CRR and SLR, unallocated Overhead Costs and
average return on networth.
18
Bank of International Settlement (BIS): Established on May 17, 1930, is one of the worlds oldest
financial institutions, and serve central banks in their pursuit of monetary and financial stability and to
foster international cooperation. It also acts as bank for central banks.
19
The Cook Ratio is a risk-weighted approach to capital adequacy so that institutions with a higher risk
profile maintain higher levels of capital.
20
Capital Adequacy ratio or Capital Adequacy Asset Ratio is the ratio of capital fund to risk weighted
assets expressed in percentage terms. The objective CRAR is to strengthen the soundness and stability of
the banking system. Minimum requirement of capital fund in India Already existing banks -9%; New
Private Sector Banks-10%; Banks under taking insurance business -10% and Local Area Banks- 15%.
21
In India Tier I capital should at no point be less than 50% of the total capital which implies that Tier II
capital cannot be more than 50% of the total capital.
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7
Impact of Reforms on the Banking Industry
The Indian banking industry had made sufficient progress during the reforms period. The most
important and far reaching impact of banking liberalization in India has been the deregulation of
the interest rate. The Indian banks are now adopting a completely market driven interest rate
structure which earlier was a government-driven interest rate structure. Interest rate deregulation
has resulted in the integration of lending rates across spectrum. The PLR of each bank is now
synchronized with the bank rate. The bank rate was revived by the RBI to serve as the reference
rate for the banking sector. In India, interest rate deregulation has contributed to a downward
movement of the domestic interest rates and a narrowing of the domestic-foreign rates differential.
Indias high budget deficits have kept domestic borrowing cost high, a factor that serves to attract
foreign equity capital. Interest rate deregulation enables to alter the borrowing cost for the
domestic borrowers. Till 1993, borrowing from abroad was costlier than domestic loans but
foreign loans became cheaper than domestic loans from 1994. This was partly because resident
firms were selectively allowed to access international capital markets after 1990 as part of capital
account liberalization.
While adopting the regulatory framework for banks, either in implementing Basel-I norms and
framing the guidelines for implementing Basel-II norms, RBI has always focused on the financial
stability objective.
The minimum Capital to Risk Asset Ratio (CRAR) for banks in India is at 9%, which is higher
than the Basel norm of 8%. Banks are also required to ensure minimum Tier I capital ratio of 6%
from April 1, 2010. Importantly, Tier I capital does not include items such as intangible assets and
deferred tax assets that are now sought to be deducted internationally. The CRAR for the
scheduled commercial banks improved to 13.2% as at end of March 2009 while Tier I ratio is
about 9%
22
.
Indian banks have a significant holding of liquid assets as they are required to maintain Cash
Reserve Ratio CRR
23
at 5.75% and Statutory Liquidity Ratio SLR
24
, at 25%
25
both, as a
proportion to their net liabilities (to see Annexure XII). Central bank liquidity support for
managing day-to-day liquidity needs of the banks is available only against SLR securities held
over and above the statutory minimum of 24%. Thus, the excess SLR maintained is always
available as a source of liquidity buffer. Besides, the Reserve Bank can also lower the SLR
requirement in a distress scenario, to make liquidity available to the banks against their resulting
excess SLR. Measures are also in place to mitigate liquidity risk at the very short end, at the
systemic level by limiting inter-connectedness, especially in the uncollateralized money market,
and at the institutional level. More than a decade ago the RBI had issued Asset-Liability
Management (ALM)
26
guidelines to banks, covering liquidity risk measurement, reporting
framework and prudential limits.

22
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/CHP04201009.pdf
23
Cash Reserve Ratio (CRR) - refers to a portion of deposits (as cash) which banks have to keep/maintain
with the RBI on fortnightly basis. This serves two purposes. It ensures that a portion of bank deposits is
totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by
tying their hands in lending money.
24
Statutory Liquid Ratio (SLR) banks are required to invest a portion of their deposits in government
securities as a part of their SLR requirements. The objective of SLR is restricting banks leverage in
pumping more money into the economy. Under Section 42 of the RBI Act, 1934 all scheduled
commercial banks are required to main SLR in cash or in gold valued at current market price or in
approved securities valued at price as specified by the RBI from time to time.
25
The CRR and SLR as on April 15, 2009 Handbook of Statistics on Indian Economy 2009-10.
26
Asset Liability Management is the practice of managing risks that arise due to mismatches between the
assets and liabilities (debts and assets) of the bank
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8
On Derivatives front, in December 2002, the banks exposure to derivatives was brought under the
capital adequacy regime by prescribing credit conversion factors linked to the maturities of interest
rate contracts and exchange rate contracts. Accordingly, since April 1, 2003 banks were advised to
adopt, either original exposure method based on original maturity or current exposure method
based on residual maturity, consistently for all derivative products, in determining
individual/group borrower exposure. After the banks gained sufficient expertise in the area, the
option of original exposure method was withdrawn and since August 2008 banks were required to
compute their credit exposures, arising from the interest rate and foreign exchange derivative
transactions using the current exposure method. The conversion factors were increased and
doubled for certain residual maturities with a view to improve the capital cushion available for
such derivative products.
During the global financial crisis, the RBI responded by providing ample rupee liquidity and
comfortable forex liquidity to ensure that credit and financial markets functioned normally. It also
gave regulatory guidance for restructuring of viable loan accounts for ensuring continued flow of
credit to productive sectors of the economy with a view to arresting growth deceleration.
Reforms in Debt Market
Debt markets in India have suffered from chronic neglect. Though there is a clear evidence of
fairly strong debt preference among households, for their investment portfolio, very little has been
done to create a platform for efficient and developed debt markets.
The secondary debt market in limited to a few brokers and institutional investors and the active
participation from the small investor is quite negligible.
By and large Indian debt markets are dominated by G-Secs (Government of India Securities).
Despite, its enormous potential, both in the primary- and secondary market, corporate debt markets
in India are all still in stages of infancy.
Reforms in G-Secs debt market were initiated to essentially move from a strategy of pre-emption
of resources from banks at administered interest rates to a more market oriented system. During
the initial stage the reforms were intended to facilitate market borrowing and price discovery was
made through auctions. Automatic monetization was restricted by fixing a cap on the during-the-
year and end-year-amount and automatic monetization of fiscal deficit through the issue of ad-hoc
treasury bills was phased out. Automatic monetization was restricted by fixing a cap on the during-
the-year and end-year amount. Transparency of prices in government securities was made by daily
publication of transactions. Repurchase agreement (repo) was introduced as a tool of short-term
liquidity adjustment. Subsequently, the Liquidity Adjustment Facility (LAF)
27
was introduced in
June 2000. LAF operates through repo and reverse repo auctions and provide a corridor for short-
term interest rate. Market Stabilization Scheme (MSS) has been introduced, which has expanded
the instruments available to the RBI for managing the enduring surplus liquidity in the system.
RBI withdrew from participating in primary market auctions of government papers. The
government also increased instruments in the government securities market. 91-day Treasury bill
was introduced for managing liquidity and benchmarking. Zero Coupon Bonds, Floating Rate
Bonds, Capital Indexed Bonds were issued and exchange traded interest rate futures were
introduced. OTC interest rate derivatives like IRS/ FRAs were introduced. Foreign Institutional
Investors (FIIs) were allowed to invest in government securities subject to certain limits.

27
The LAF enables the Reserve Bank to modulate short-term liquidity under varied financial market
conditions in order to ensure stable conditions in the overnight (call) money market. The LAF operates
through daily repo and reverse repo auctions.
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9
Later the reforms were focused on the market microstructure. The emphasis has been introducing a
system of primary dealers; establishing Ways and Means Advances (WMA) to the central
government to bridge temporary mismatches in its receipts and payments; strengthening the
government cash management system to facilitate government borrowing in cost-effective manner
and permitting foreign institutional investors to invest in government securities including treasury
bills, both in primary and in secondary market.
Significant reforms were also taken in corporate debt market. Clearing Corporation of India
Limited (CCIL) was set up for debt instruments to facilitate risk-free payments and settlement
systems in government securities and also for dematerialization. A Wholesale Debt Market
(WDM) segment has been set up by the National Stock Exchange and automated screen-based
trading in government securities and corporate securities was facilitated through Negotiated
Dealing System (NDS)
28
. Trading in government securities on stock exchanges was allowed for
promoting retailing in securities and permitting non-banks to participate in repo market. The recent
measures include introduction of NDS+OM and T+1 settlement norms.
As regards the foreign exchange market, reforms focused on market development with inbuilt
prudential safeguards so that the market would not be destabilized in the process. The move
towards a market-based exchange rate regime in 1993 and the subsequent adoption of current
account convertibility were the key measures in reforming the Indian foreign exchange market.
Banks are increasingly being given greater autonomy to undertake foreign exchange operations. In
order to deepen the foreign exchange market, a large number of products have been introduced and
entry of new players has been allowed in the market.
Foreign Exchange Market Reforms
Indias foreign exchange market was strictly controlled since the 1950s. Both the current and
capital accounts were closed to foster import substitution. Foreign exchange was made available
by the RBI, through a complex licensing system. In the face of balance of payment crisis, the rupee
was devalued twice in July 1991 leading to 19.5% depreciation in its value. The partial
convertibility of rupee on the trade account was announced during 1992-93, and subsequently
broadened to full convertibility of rupee on current account. The exchange rate regime moved
from a single currency fixed-exchange rate system to fixing the value of rupee against a basket of
currencies and further to market-determined floating exchange rate regime. Foreign Exchange
Regulation Act (FERA) 1973, was replaced by the market friendly Foreign Exchange Management
Act (FEMA) 1999. Authorized dealers of foreign exchange have been given considerable powers
by the RBI to release foreign exchange for a variety of purposes. Authorized dealers are permitted
to use innovative products like cross-currency options, interest rate and currency swaps,
caps/collars and Forward Rate Agreements (FRAs) in the international forex market. Foreign
exchange earners are permitted to maintain foreign currency accounts. The major foreign exchange
market reforms are:
Exchange Rate Regime
1. Evolution of exchange rate regime from a single-currency fixed-exchange rate system to fixing
the value of rupee against a basket of currencies and further to market-determined floating
exchange rate regime.
2. Adoption of convertibility of rupee for current account transactions with acceptance of Article
VIII of the Articles of Agreement of the IMF. Allowed full capital account convertibility for
non-residents

28
Negotiated Dealing System an electronic trading platform, operated by the Reserve Bank of India, used
to facilitate the exchange of government securities and other money market instruments.
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10
The institutional frameworks reform include Replacement of the FERA, 1973, by the market
friendly, FEMA, 1999 and delegation of considerable powers by RBI to authorized dealers to
release foreign exchange for a variety of purposes.
Increase in Instruments in the Foreign Exchange Market
1. Development of rupee-foreign currency swap market.
2. Introduction of additional hedging instruments such as foreign currency-rupee options.
Authorized dealers permitted to use innovative products like cross-currency options; Interest
Rate Swaps (IRS) and currency swaps, caps/collars and FRAs in the international forex
market.
Liberalization Measures
1. Authorized dealers permitted to initiate trading positions, borrow and invest in overseas
markets subject to certain specifications and ratification by respective Banks Boards. Banks
are also permitted to fix interest rates on non-resident deposits, subject to certain
specifications, use derivative products for asset-liability management and fix overnight open
position limits and gap limits in the foreign exchange market, subject to ratification by the
RBI.
2. Permission to various participants in the foreign exchange market, including exporters, Indians
investing abroad, FIIs, to avail forward cover and enter into swap transactions without any
limit subject to genuine underlying exposure.
3. FIIs and NRIs permitted to trade in exchange-traded derivative contracts subject to certain
conditions.
4. Foreign exchange earners permitted to maintain foreign currency accounts. Residents are
permitted to open such accounts within the general limit of US $ 25, 000 per year.
Reforms in the Capital Market
Prior to 1991, the Indian capital market was regulated by the Capital Issues (Control) Act 1947.
The Ministry of Finance controlled the price and quantity of initial public offerings through the
powers of the Controller of Capital Issues (CCI). The Act was designed to check the access of
private sector to capital markets. It approved all aspects of private companies issuances of capital,
the instruments, the volumes and the offer price. The price was based on historical earnings, a
practice which often resulted in under-pricing of public offerings of equity shares.
The Ministry of Finance set interest rates on fixed income products, which limited the access to
capital and financial services. There were few private banks and they faced significant limitation
on business expansion. Entry barriers throughout the financial sector limited opportunities to start
banks, mutual funds and stock exchanges. The government-owned Unit Trust of India (UTI) was
the significant participant in Indias mutual fund industry and a pillar of the Indian capital market.
Large government institutions such as the Industrial Development Bank of India (IDBI) and Life
Insurance Corporation (LIC), remained marginal players, either because prudential regulations did
not permit them to invest in equities, or because they were not actively trading the equities in their
portfolios. Insurance companies and pension funds were government-owned institutions and
government controls funneled these agencies to invest in government bonds and bank deposits.
Speculators and retail investors dominated the market. The oldest and largest Indian stock
exchange was the then member owned Bombay Stock Exchange (BSE). It traded for only two
hours with an open outcry system. It was managed in the interest of its member brokers who had
inherited the membership. During the pre-reforms period, BSE dominated the trading volume of
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11
the country; it accounted for more than 75% of the total trade. It operated as an unregulated market
and murky trade practices were prevalent. The operations were often small, undercapitalized and
non-transparent and there was rampant price rigging and insider trading in the stock market. There
was no formal approach towards risk containment in the settlement process. The BSE practiced
badla system that allowed positions to be rolled from one settlement period to another. It
witnessed payment crisis from time to time, which were resolved through negotiation and coalition
formation.
Capital Market Reforms and Creation of New Institutions
The New Economic Policy (1991) led to a major change in the regulatory framework of the capital
markets in India. The Capital Issues (Control) Act 1947 was repealed and the Securities Exchange
Board of India (SEBI) was set up, in 1988 and given statutory powers in 1992, as a watchdog for
regulating the functioning of the capital market. The creation of the SEBI was a major milestone in
Indian economic policy thinking. The creation of a new and independent regulator led to focused
reforms of the equity markets as well as on market modernization. During the 1990s, SEBI and the
government brought a series of profound changes in the market Online trading and
dematerialized trading were introduced along with a series of reforms to improve investor
protection, automation of stock trading, integration of national markets and efficiency of market
operations that shaped market operations. The major reforms are:
Allowing FII investment in Capital Markets: In September 1992, the government allowed
foreign investment in Indian capital markets. Foreign Institutional Investors (FIIs) were allowed to
invest in all types of securities traded on the primary and secondary markets with full repatriation
benefits without restrictions on either volume or trading or lock-in-period. Indian companies were
allowed to raise resources abroad through Global Depository Receipts (GDRs) and Foreign
Currency Convertible Bonds (FCCBs). Foreign portfolio investments in Indian companies are
limited to individual foreign ownership at 10% of the total issued capital of any one company and
to aggregate foreign ownership at 30% of the total issued capital of any one company (to see
Annexure XIII and Annexure XIV for Foreign investments).
Incorporation of National Stock Exchange: In 1994, the policy makers pushed for more
fundamental reforms in the capital markets and shifted their focus onto creation of a new exchange
that would compete with the BSE. The National Stock Exchange (NSE), incorporated in 1992,
recognized as stock exchange in 1994, provided a nationwide trading facility for all types of
securities ensuring equal access to investors all over the country. It established satellite
communication which gave its members equal access to the market, providing a fair, efficient and
transparent securities market using electronic trading system. NSE introduced shorter settlement
cycles with orders matched electronically on the basis of price-time priority. The electronic order
matching system increased the speed and the transparency of the price discovery process. As
opposed to being an association of brokers, NSE was the nations first demutualized stock
exchange with a professional management team running the operations of the exchange. This
structure of NSE predated a widespread interest and the SEBI forced other stock exchanges in the
country including BSE to go for demutualization. NSE started trading bonds in June 1994 and
equities in November 1994. The impact of NSE on Indian capital market was tremendous. A year
after NSE started trading equities, the trading volumes increased by more than 100% and
brokerage fee dropped from 2.5% to less than 0.5%. To compete with NSE, BSE transformed itself
by shifting from open outcry to electronic limit order book in March 1995 and in 2004 the
exchange became demutualized.
Depositories Act: India took a major step towards market modernization with the enactment of
the Depositories Act of 1996. This act established the rights and obligations of depositories,
participants, issuers, and beneficial owners. The act requires all securities held by a depository to
be in dematerialized and in fungible form. The depository Act ensured free transferability of
securities with speed, accuracy, and security. The act allowed the market to move form a slow,
risky, paper-based settlement to electronic dematerialized securities eliminating many of the pre-
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12
exiting impediments to swift and safe settlement. Dematerialization allowed real -time gross
settlement and electronic funds transfer that led to the securities market achieving T+2
Settlement.
Derivatives Trading: The Securities Contracts Regulation Act (SCRA) was amended in
December 1999, to include derivatives within the ambit of securities enabling trading of options
and futures in equity markets. Derivatives trading in India began in June, 2003 with trading in
stock index futures contracts. Since the commencement of derivatives trading in India, the NSE
has become one of the largest exchanges in trading single stock futures and index futures in the
world. At present BSE and NSE allows trading of equity trade futures, futures and options for
individual stocks, and futures and options on respective stock exchanges, Gold Exchange Traded
Funds and also interest rate futures and currency futures on their exchanges.
Interest Rate Futures (IRF) were allowed to trade on NSE in June 2003. NSE introduced three
underlying contracts of IRF on three underlying contracts notional 10 year coupon bearing bond,
notional 10 year zero coupon bond and 91-treasury bill. Earlier banks and companies had only
Over-The Counter (OTC) market to hedge their risks, which proved to be disadvantageous and risk
for smaller companies and banks. To remove the counterparty risk and disadvantages the IRFs
were introduced. At the time of introduction, it was believed that IRF would provide scientific risk
management techniques and protect small investors interest. However, the participants response
was unenthusiastic and it failed to take-off in the derivatives market, as banks, a major player in
this instrument, were not allowed to hedge interest rate risk. Though present in the market, they
failed to attract participants and literally no trading took place.
To address the problem, the RBI appointed a Technical Advisory Committee (TAC) on Money,
Foreign Exchange and Government Securities Market to review the experience and
recommendation for activating the IRFs. One of the main reasons of IRF failure, according to the
committee report, was deficiency in the product design of the bond futures contract which was
required to be cash-settled and valued off a Zero Coupon Yield Curve (ZCYC)
29
. The committee
also opined that, instead of cash-settlement, the bond future contracts would have to be physically
settled as is the case in all the developed, mature financial markets.The TAC suggested to
introduce a futures contract bade on a notional coupon bearing 10-year bond, settled by physical
delivery and for introducing contacts based on 2-year, 5-year and 30-year Government of India
securities/ other maturities or coupons. Interest rate futures on 10-Year Notional Coupon-bearing
GOI security, was reintroduced in August 2008 to provide investors with a hedging tool against
interest rate fluctuations. Along with NSE, Multi-Commodity Exchange (MCX) was also allowed
to trade interest rate futures on its exchange.
After SEBI giving the nod NSE commenced trading currency futures on August 29, 2008 in US
Dollar Indian Rupee (USD-INR). It also commenced trading in other currency like Euro-INR,
Pound Sterling-INR, and Japanese Yen-INR in March 2010. At present only Indian investors are
allowed to trade in currency derivatives, while NRIs and FIIs are not permitted.
Commodity Futures Market
After the Securities Laws (amendment) Bill was passed in 1999, the Central Government allowed
trading of commodity futures in three exchanges namely Multi Commodity Exchange (MCX),
National Commodity and Derivatives Exchange (NCEDX). National Multi Commodity Exchange
(MMCE). India has five national level commodities exchanges and the commodity futures trading
volumes, taken as a whole, have risen at a compounded annual growth rate of 97.9% between
2003-04 and 2009-10. The turnover in the commodities grew by 48% in the fiscal year 2009-10 to
Rs.77.65 lakh crore.

29
Report on Interest Rate Futures, Technical Advisory Committee on Money, Foreign Exchange and
Government Securities Markets, RBI, August 2008.
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13
A Dynamic Capital Market
Structural reforms combined with SEBI regulations ushered in expansion of primary- and
secondary capital markets rapidly. SEBI regulatory reforms ensured wider participation of
individual investors. Reforms brought transparency in the areas of trading, clearing and settlement,
and risk management system.
The biggest impact on Indian capital market is the unique stock price across the country for the
firms listed on the stock exchanges. Prior to the reforms, equity markets were fragmented across
multiple local exchanges. High costs of telecommunications and physical settlement meant that the
price of a stock that traded widely could vary on different exchanges. The technology-based
systems helped minimize systematic and settlement risk, increased the accountability of
professional market participants and helped detect and discourage insider trading, manipulations
and scams.
The equity market reforms raised the confidence in reform processes throughout the financial
market, strengthening the regulator and building market institutions to improve competition in the
capital markets. The emergence of SEBI as a credible market regulator with greater investigative
and enforcement powers enhanced investor protection, accountability and transparency in the
equity markets, enabling competitive forces to shape an efficient market in which many systemic
and infrastructure risks that existed earlier are greatly reduced.
The efficiency in the markets and transparency in conduct of the business enabled the flow of
foreign funds into the markets thereby increasing market valuations. The flow of funds enabled the
firms to venture into global markets through acquisitions, further expansions by investing in
domestic projects, and raising additional capital in domestic and foreign markets. Driven by large
capital and global liquidity including inbound and outbound deals, the mergers and acquisitions in
2007 stood at US $68.32 billion.
The financial reforms were undertaken propelled by globalization and to attract foreign direct and
portfolio investment. With this the Indian capital markets moved towards greater transparency and
full convergence. In the course of the reforms, the stock markets did face some critical moments
such as the Harshad Mehta stock scam, price manipulation of stocks, Ketan Parekh scam, Yes IPO
scam, etc. However, timely regulations for strengthening the market institutions enhanced the
confidence in the reforms process and effectiveness of the equity markets. The reforms process
saw India moving from paper based scrip trading to electronic trading, transformation of BSE from
an unregulated institution to a regulated institution. The Indian capital markets transformed from
inward markets to globally competitive ones by bringing in transparency, adopting international
accounting standards, and developing derivatives markets.
In the last 15 years, SEBI emerged as the statutory regulator of Indias securities markets. India
now has a developed regulatory environment, a modern market infrastructure, and a steadily
increasing market capitalization. The investments by international financial institutions in Indian
exchanges signify the strength of the Indian capital market and reinforce its presence in the global
markets. In June 2007, Deutsche Brse and Singapore Exchange Ltd. (SGX) bought 5% stake each
in NSE by paying about Rs 200 crore each while the NYSE Group, owner of the NYSE, and three
international investment groups General Atlantic, Goldman Sachs, and Softbank Asia
Infrastructure Fund (SAIF) purchased a 20% stake in NSE.
Investments by globally prominent financial institutions, that are strongly positioned in North
America, Europe and Asia, in Indian stock exchanges bring along capital resources, experience,
and improved network. These investments will significantly strengthen the Indian exchanges,
reinforce ties with global markets and improve the BSE and NSEs strategic positions, enabling
India to develop as an international financial centre that will integrate with global markets.
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14
Economic Reforms and Impact on India
The impact of reforms on Indias economic performance has been a subject of much debate in and
outside India. As the reforms were implemented at a time of crisis when the economy was in
depression and India had to resort to IMF financing and a structural adjustment loan from the
World Bank, they were criticized as being driven by the IMF and World Bank which on the
contrary were carried out after considerable internal thinking. Although the reforms were broadly
in line with what was considered sensible policy by international institutions, this was more a
reflection of a genuine convergence of views on development policy than of pressure exerted by
the IMF and the World Bank.
The initial response to the reforms was an impressive acceleration in annual GDP growth, which
averaged 6.7% in the first half of the reform period (199297). This acceleration was widely
viewed as vindicating the government's approach. But in the second half of the reforms period
(19982003), the growth rate decelerated to an average of about 5.7%. The deceleration in the
growth was explained under two factors the slowing down of the global economy in the wake of
the East Asian crisis and the collapse of the technology boom in the U. S. However, the growth
rate again rose and averaged well above 6%.
India, like most other emerging market economies, has so far, not been seriously affected by the
recent financial turmoil witnessed in the developed economies. The relatively little impact of the
global financial crisis on Indian financial markets could be due to the more calibrated approach
followed in opening up of the financial sector and also the opening of the capital account. The
difference between many other countries that took the same path is bringing reforms in a phased
manner, either by phasing out import licensing or capital account liberalization. The gradual
liberalization of the capital account did save India from being swept during the Asian Crisis. The
East Asian economies with relatively more open capital account were swept in a capital-outflow
leading to financial and currency crisis of 1997. India too was affected, but mostly due to loss of
export demand and loss of confidence throughout the whole region. Nonetheless, it did provide for
interesting conditions. The Capital Convertibility Committee, highlighting the benefits of a more
open capital account, recommended three significant pre-conditions like having fiscal deficit less
than 3.5% of the GDP, inflation within the band of 36% and having at least six months of import
cover. The Indian economy is now a relatively an open economy, despite the capital account not
being fully open. According to RBI statistics, the current account, as measured by the sum of
current receipts and current payments, stood at 53% of the GDP in 2007-08, up from 19% of the
GDP in 1991. The capital account, measured as the sum of gross capital inflows and outflows,
increased from 12% of the GDP in 1990-91, to around 64% in 2007-08. The fiscal management in
the country has significantly improved with the combined fiscal deficit of Centre and States
declining from 9.5% of the GDP in 20002001 to 2.7% in 2007-08.
Economists opine that the gradualism and the slow pace of reforms saved India from the global
financial crisis. According to Arvind Subramanium,
30
the global financial crisis spread through
two channels finance and trade. According to him Eastern European countries suffered due to
foreign capital flying out of the country, resulting disruptions in their exchange rates, asset price
and as a whole disrupting financial systems. He opines that India followed a strategy of goldilocks
globalization
31
i.e neither relying too much on foreign finance nor relying too much on exports.
Keeping its current account deficit at low was another factor which insured the country from
financial crisis. Indias current account deficit was at 2-3 percent of GDP compared to Eastern
European countries deficit of over 10% of GDP. This cushion enabled India to provide dollars to
investors and assured foreign investment from flying away.

30
http://www.iie.com/publications/opeds/print.cfm?researchid=1238&doc=pub
31
Arvind Subramanium, Peterson Institute for International Economics India's Goldilocks Globalization,
Op-ed in Newsweek, June 15, 2009
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15
Economists argue that, Indian financial system was saved due to the policy approach of gradual
and calibrated integration of the domestic financial system with overseas markets, especially the
debt markets through capital controls as also well-modulated regulatory policies to contain
bank exposure to sensitive sectors, which are more prone to asset bubbles such as real estate and
capital markets. Further, ensuring that banks maintained adequate capital and liquidity while
containing undue volatility in the forex and debt markets helped in preserving financial stability
while promoting growth. In understanding the Indian perspective on banking regulation, it would
be useful to look at the regulatory framework prior to the crisis and the measures initiated to
strengthen it in the wake of the crisis.
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16
Annexure I
Foreign Exchange Reserves
E
n
d

o
f

F
i
n
a
n
c
i
a
l

Y
e
a
r
SDRs## Gold#
Foreign Currency
Assets*
Reserve
Tranche
Position
Total
Rupees
Crore
USD
Million
Rupees
Crore
USD
Million
Rupees
Crore
USD
Million
Rupees
Crore
USD
Million
Rupees
Crore
USD
Million
1953-54 118 247 792 1664 910 1911
1954-55 118 247 774 1626 892 1873
1955-56 118 247 785 1648 903 1895
1956-57 118 247 563 1184 681 1431
1957-58 118 247 303 637 421 884
1958-59 118 247 261 548 379 795
1959-60 118 247 245 515 363 762
1960-61 118 247 186 390 304 637
1961-62 118 247 180 377 298 624
1962-63 118 247 177 372 295 619
1963-64 118 247 188 395 306 642
1964-65 134 281 116 243 250 524
1965-66 116 243 182 383 298 626
1966-67 183 243 296 395 479 638
1967-68 183 243 356 475 539 718
1968-69 183 243 394 526 577 769
1969-70 92 123 183 243 546 728 821 1094
1970-71 112 148 183 243 438 584 733 975
1971-72 194 269 183 264 480 661 857 1194
1972-73 226 297 183 293 479 629 888 1219
1973-74 230 296 183 293 581 736 994 1325
1974-75 229 293 183 304 610 782 1022 1379
1975-76 211 234 183 281 1492 1657 1886 2172
1976-77 192 217 188 290 2863 3240 3243 3747
1977-78 170 200 193 319 4500 5305 4863 5824
1978-79 381 470 220 377 5220 6421 5821 7268
1979-80 545 662 225 375 5164 6324 5934 7361
1980-81 497 603 226 370 4822 5850 5545 6823
1981-82 444 473 226 335 3355 3582 4025 4390
1982-83 291 291 226 324 4265 4281 4782 4896
1983-84 248 230 226 320 5498 5099 5972 5649
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17
E
n
d

o
f

F
i
n
a
n
c
i
a
l

Y
e
a
r
SDRs## Gold#
Foreign Currency
Assets*
Reserve
Tranche
Position
Total
Rupees
Crore
USD
Million
Rupees
Crore
USD
Million
Rupees
Crore
USD
Million
Rupees
Crore
USD
Million
Rupees
Crore
USD
Million
1984-85 181 145 246 325 6817 5482 7243 5952
1985-86 161 131 274 417 7384 5972 7819 6520
1986-87 232 179 274 471 7645 5924 8151 6574
1987-88 125 97 274 508 7287 5618 7686 6223
1988-89 161 103 274 473 6605 4226 7040 4802
1989-90 184 107 281 487 5787 3368 6252 3962
1990-91 200 102 6828 3496 4388 2236 11416 5834
1991-92 233 90 9039 3499 14578 5631 23850 9220
1992-93 55 18 10549 3380 20140 6434 30744 9832
1993-94 339 108 12794 4078 47287 15068 60420 19254
1994-95 23 7 13752 4370 66005 20809 79780 25186
1995-96 280 82 15658 4561 58446 17044 74384 21687
1996-97 7 2 14557 4054 80368 22367 94932 26423
1997-98 4 1 13394 3391 102507 25975 115905 29367
1998-99 34 8 12559 2960 125412 29522 138005 32490
1999-00 16 4 12973 2974 152924 35058 165913 38036
2000-01 11 2 12711 2725 184482 39554 197204 42281
2001-02 50 10 14868 3047 249118 51049 264036 54106
2002-03 19 4 16785 3534 341476 71890 3190 672 361470 76100
2003-04 10 2 18216 4198 466215 107448 5688 1311 490129 112959
2004-05 20 5 19686 4500 593121 135571 6289 1438 619116 141514
2005-06 12 3 25674 5755 647327 145108 3374 756 676387 151622
2006-07 8 2 29573 6784 836597 191924 2044 469 868222 199179
2007-08 74 18 40124 10039 1196023 299230 1744 436 1237965 309723
2008-09 6 1 48793 9577 1230066 241426 5000 981 1283865 251985
2009-10 22596 5006 81188 17986 1149650 254685 6231 1380 1259665 279057
* FCA excludes US $ 250.00 million (as also its equivalent value in Indian Rupee) invested in foreign currency
denominated bonds issued by IIFC (UK) since March 20, 2009.
# Includes Rupees 31463 crore(US $ 6699 million) reflecting the purchase of 200 metric tonnes of gold from IMF on
November 3, 2009.
## Includes SDRs 3082.5 million allocated under general allocation and SDRs 214.6 million allocated under special
allocation by the IMF done on August 28, 2009 and September 9, 2009, respectively.
Source: compiled from Reserve Bank of India and Handbook of Statistics on Indian Economy 2009-10

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18
Annexure II
Macro-Economic Aggregates - Growth Rates and Investment Rates
(At Constant Prices) (%)
Year
Annual Growth Rate
Rate of
GDCF
Rate of
NDCF
GDP at
Factor Cost
NDP at
Factor Cost
GNP at
Factor Cost
NNP at
Factor Cost
Per Capita
NNP
New Series (Base : 1999-2000)
1950-51 10.4 2.6
1951-52 2.3 2.1 2.5 2.3 0.6 12.9 5.1
1952-53 2.8 2.8 2.9 2.8 0.9 9.2 1.1
1953-54 6.1 6.3 6.1 6.4 4.4 9.9 2.1
1954-55 4.2 4.3 4.2 4.2 2.3 10.6 2.9
1955-56 2.6 6.3 2.7 6.5 4.6 13.9 9.6
1956-57 5.7 5.5 5.7 5.5 3.4 15.9 11.6
1957-58 -1.2 -1.7 -1.3 -1.8 -3.7 14.9 10.1
1958-59 7.6 7.6 7.5 7.6 5.3 13.8 9.0
1959-60 2.2 1.9 2.0 1.7 -0.2 13.4 8.3
1960-61 7.1 7.2 7.0 7.2 5.2 15.0 10.0
1961-62 3.1 2.9 3.0 2.7 0.4 14.2 9.1
1962-63 2.1 1.8 2.0 1.8 -0.5 15.7 10.5
1963-64 5.1 5.6 5.1 5.7 3.4 16.1 11.3
1964-65 7.6 7.5 7.5 7.4 5.2 16.3 11.5
1965-66 -3.7 -4.4 -3.7 -4.5 -6.6 18.8 13.6
1966-67 1.0 0.5 1.0 0.6 -1.5 20.4 15.0
1967-68 8.1 8.1 8.0 8.0 5.7 17.7 12.1
1968-69 2.6 3.0 2.7 3.1 0.7 16.7 11.3
1969-70 6.5 6.4 6.5 6.4 4.2 17.9 12.5
1970-71 5.0 4.9 5.0 4.9 2.6 17.4 11.8
1971-72 1.0 0.6 1.0 0.6 -1.8 17.9 12.1
1972-73 -0.3 -0.9 -0.3 -0.8 -3.1 18.0 11.7
1973-74 4.6 4.4 4.7 4.5 2.2 20.7 14.4
1974-75 1.2 0.7 1.3 0.9 -1.3 18.3 11.5
1975-76 9.0 9.3 9.1 9.5 6.9 17.4 10.8
1976-77 1.2 0.9 1.3 0.9 -1.2 19.4 12.7
1977-78 7.5 7.6 7.6 7.7 5.3 20.0 13.4
1978-79 5.5 5.5 5.5 5.5 3.2 22.8 16.5
1979-80 -5.2 -6.2 -5.0 -6.0 -8.2 21.8 14.5
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19
Year
Annual Growth Rate
Rate of
GDCF
Rate of
NDCF
GDP at
Factor Cost
NDP at
Factor Cost
GNP at
Factor Cost
NNP at
Factor Cost
Per Capita
NNP
New Series (Base : 1999-2000)
1980-81 7.2 7.3 7.2 7.4 5.0 21.5 14.3
1981-82 5.6 5.7 5.5 5.5 3.5 19.6 12.2
1982-83 2.9 2.7 2.6 2.3 -0.1 18.9 11.3
1983-84 7.9 8.1 7.8 8.1 5.8 18.5 11.0
1984-85 4.0 3.8 3.8 3.6 1.3 19.2 11.7
1985-86 4.2 4.0 4.2 4.0 1.8 20.0 12.5
1986-87 4.3 4.2 4.3 4.1 2.0 19.2 11.6
1987-88 3.5 3.3 3.3 3.0 0.8 21.1 13.5
1988-89 10.2 10.6 9.8 10.3 7.9 21.9 14.6
1989-90 6.1 6.1 6.1 6.1 3.9 22.1 14.8
1990-91 5.3 5.5 5.0 5.2 3.1 24.4 17.5
1991-92 1.4 0.9 1.4 0.9 -1.1 20.4 12.7
1992-93 5.4 5.3 5.4 5.4 3.4 21.2 13.5
1993-94 5.7 5.6 5.9 5.9 3.5 21.5 13.7
1994-95 6.4 6.4 6.5 6.5 4.4 24.6 17.1
1995-96 7.3 7.3 7.3 7.3 5.2 24.6 17.2
1996-97 8.0 8.1 8.1 8.2 6.2 22.7 15.2
1997-98 4.3 4.0 4.5 4.3 2.3 24.5 16.9
1998-99 6.7 6.6 6.7 6.6 4.6 23.1 15.3
1999-00 6.4 6.2 6.4 6.2 4.3 25.9 18.3
2000-01 4.4 4.1 4.0 3.7 1.8 24.1 16.0
2001-02 5.8 5.6 6.0 5.8 3.7 22.2 13.8
2002-03 3.8 3.4 4.0 3.6 2.0 25.0 16.6
2003-04 8.5 8.6 8.5 8.6 7.0 27.1 19.0
2004-05 7.5 7.3 7.5 7.3 5.6 30.5 22.7
2005-06 9.5 9.5 9.6 9.6 8.0 33.3 25.8
2006-07 9.7 9.7 9.8 9.8 8.2 34.4 27.0
2007-08 9.0 8.8 9.3 9.1 7.6 36.2 28.9
2008-09 6.7 6.4 6.7 6.4 4.9 - -
Note : (1) Data for 2006-07 are provisional.
(2) Data for 2007-08 are quick estimates.
(3) Data for 2008-09 are revised estimates.
(4) Rate of GDCF is %age to GDP at market prices.
(5) Rate of NDCF is %age to NDP at market prices.
Source: Central Statistical Organization.
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Annexure III
Average Annual GDP Growth in India, China, and Developing Regions, 1971-2003
Country/region 1971-80 1981-90 1992-97 1998-2003
India 3.2 5.7 6.7 5.7
China 6.3 9.3 11.5 7.7
Sub-Saharan Africa 3.3 2.2 2.3 3.0
Developing Asia excl. China and India 5.8 5.0 6.2 2.7
Middle East and North Africa 6.3 2.4 3.3 4.3
Latin America and Caribbean 6.1 1.5 3.9 1.3
All developing countries 5.5 4.1 6.3 4.5
Source: IMF, World Economic Outlook.

Annexure IV
Fiscal Indicators for India
(As %age to GDP)
Year
Gross
Fiscal
Deficit
Net
Fiscal
Deficit
Gross
Primary
Deficit
Net
Primary
Deficit
Revenue
Deficit
Primary
Revenue
Deficit
Draw Down
of Cash
Balances
Net RBI
Credit to
Centre
1970-71 3.04 1.69 1.74 1.62 -0.35 -1.66 0.62 0.48
1971-72 3.49 2.46 2.13 2.31 0.20 -1.15 1.05 1.18
1972-73 3.99 1.81 2.57 1.70 0.03 -1.39 1.59 2.22
1973-74 2.61 1.16 1.28 0.94 -0.36 -1.68 0.49 0.95
1974-75 2.94 1.10 1.66 0.82 -0.98 -2.25 0.92 0.67
1975-76 3.60 1.62 2.14 1.27 -1.05 -2.51 0.44 -0.34
1976-77 4.19 1.73 2.55 1.31 -0.33 -1.97 0.14 0.90
1977-78 3.58 1.76 1.98 1.56 -0.42 -2.02 0.91 -0.25
1978-79 5.13 1.91 3.35 1.41 -0.26 -2.04 1.35 1.97
1979-80 5.23 2.56 3.36 1.80 0.57 -1.31 1.99 2.17
1980-81 5.71 3.52 3.92 2.96 1.40 -0.39 1.70 2.44
1981-82 5.07 2.69 3.20 2.11 0.23 -1.64 0.82 1.88
1982-83 5.56 3.13 3.50 2.56 0.68 -1.38 0.87 1.76
1983-84 5.86 3.49 3.70 2.54 1.14 -1.01 0.64 1.77
1984-85 6.99 4.40 4.59 3.59 1.69 -0.70 1.50 2.43
1985-86 7.77 4.81 5.10 3.78 2.09 -0.58 1.89 2.20
1986-87 8.37 5.41 5.43 4.17 2.47 -0.47 2.62 2.25
1987-88 7.56 5.15 4.41 3.61 2.55 -0.59 1.63 1.83
1988-89 7.28 4.89 3.92 3.17 2.48 -0.89 1.33 1.53
1989-90 7.31 4.86 3.67 2.96 2.44 -1.20 2.17 2.83
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21
Year
Gross
Fiscal
Deficit
Net
Fiscal
Deficit
Gross
Primary
Deficit
Net
Primary
Deficit
Revenue
Deficit
Primary
Revenue
Deficit
Draw Down
of Cash
Balances
Net RBI
Credit to
Centre
1990-91 7.84 5.39 4.06 3.15 3.26 -0.52 1.99 2.59
1991-92 5.55 3.76 1.49 1.37 2.48 -1.58 1.05 0.84
1992-93 5.34 4.02 1.21 1.55 2.47 -1.66 1.64 0.57
1993-94 6.96 5.31 2.72 2.81 3.78 -0.46 1.27 0.03
1994-95 5.68 3.97 1.34 1.19 3.05 -1.28 0.09 0.21
1995-96 5.05 3.56 0.86 0.91 2.49 -1.70 0.82 1.67
1996-97 4.84 3.37 0.53 0.65 2.37 -1.95 0.96 0.14
1997-98 5.82 4.13 1.53 1.49 3.04 -1.26 -0.06 0.85
1998-99 6.47 4.57 2.03 1.84 3.82 -0.62 -0.01 0.67
1999-00 5.36 4.61 0.74 1.72 3.46 -1.16 0.04 -0.29
2000-01 5.65 5.13 0.93 1.97 4.05 -0.67 -0.06 0.32
2001-02 6.19 5.40 1.47 2.24 4.40 -0.32 -0.07 -0.23
2002-03 5.91 5.45 1.11 2.19 4.40 -0.40 0.08 -1.16
2003-04 4.48 4.20 -0.03 1.09 3.57 -0.94 -0.14 -2.76
2004-05 3.99 4.01 -0.04 1.01 2.49 -1.54 -0.26 -1.91
2005-06 4.08 4.06 0.38 0.98 2.57 -1.12 -0.58 0.79
2006-07 3.45 3.66 -0.19 0.57 1.94 -1.70 0.11 -0.07
2007-08 2.69 2.56 -0.93 -0.62 1.11 -2.51 0.56 -2.47
2008-09 6.14 6.05 2.51 2.79 4.53 0.91 -1.13 3.31
2009-10 6.85 6.71 3.00 3.19 4.83 0.98 - -
Source:www.rbi.india.org
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22
Annexure V
Balance of Payments Indicators
(%)
Year
Trade Invisibles Current Account Capital Account
Import
Cover of
Reserves
(in months)
E
x
p
o
r
t
s
/

G
D
P

I
m
p
o
r
t
s
/

G
D
P

R
e
c
e
i
p
t
s
/

G
D
P

P
a
y
m
e
n
t
s
/

G
D
P

N
e
t
/

G
D
P

C
u
r
r
e
n
t

R
e
c
e
i
p
t
s
/

G
D
P

C
u
r
r
e
n
t

R
e
c
e
i
p
t
s
/

C
u
r
r
e
n
t

P
a
y
m
e
n
t
s
C
A
D
/

G
D
P

F
o
r
e
i
g
n

I
n
v
e
s
t
m
e
n
t
/

E
x
p
o
r
t
s

F
o
r
e
i
g
n

I
n
v
e
s
t
m
e
n
t
/

G
D
P

1970-71 3.1 3.9 1.1 1.2 0.1 3.9 75.7 1.0 2.5 0.1 4.8
1971-72 3.2 4.1 1.1 1.2 0.1 4.0 75.0 1.0 2.7 0.1 5.2
1972-73 3.7 4.0 0.9 1.2 0.3 4.4 84.7 0.6 1.6 0.1 5.2
1973-74 3.5 4.3 3.4 1.0 2.5 4.3 82.0 1.7 2.2 0.1 4.4
1974-75 4.1 5.7 1.3 0.8 0.4 5.1 78.5 1.2 2.2 0.1 2.9
1975-76 5.0 6.4 2.2 1.0 1.2 6.5 89.3 0.2 0.2 0.0 4.2
1976-77 5.7 6.0 2.4 1.1 1.3 7.7 107.7 1.0 0.5 0.0 7.4
1977-78 5.3 5.9 2.7 1.0 1.7 7.6 110.3 1.1 -0.2 0.0 9.9
1978-79 5.0 7.0 2.9 1.1 1.8 7.4 91.4 0.2 0.4 0.0 9.2
1979-80 5.2 8.0 3.6 1.2 2.4 8.3 90.6 0.5 1.1 0.1 7.3
1980-81 4.6 8.9 3.9 1.2 2.8 8.1 80.7 1.5 0.0 0.0 5.0
1981-82 4.5 8.3 3.3 1.2 2.1 7.6 79.8 1.7 0.0 0.0 3.3
1982-83 4.8 8.3 3.2 1.4 1.8 7.8 80.2 1.7 0.0 0.0 3.6
1983-84 4.6 7.7 3.1 1.5 1.6 7.5 81.8 1.5 0.0 0.0 4.1
1984-85 4.8 7.5 3.3 1.8 1.5 7.9 85.1 1.2 0.0 0.0 4.5
1985-86 4.1 7.5 2.8 1.5 1.3 6.8 74.8 2.1 0.0 0.0 4.5
1986-87 4.2 7.2 2.6 1.5 1.1 6.7 76.8 1.9 1.9 0.1 4.4
1987-88 4.6 7.2 2.6 1.8 0.8 7.0 78.6 1.8 3.4 0.2 3.8
1988-89 4.9 8.1 2.6 2.1 0.5 7.3 71.5 2.7 2.5 0.1 2.4
1989-90 5.8 8.3 2.6 2.3 0.2 8.2 76.4 2.3 2.4 0.1 1.9
1990-91 5.8 8.8 2.4 2.4 -0.1 8.0 71.5 3.0 0.6 0.0 2.5
1991-92 6.9 7.9 3.6 2.9 0.7 10.3 94.3 0.3 0.7 0.1 5.3
1992-93 7.3 9.6 3.6 3.0 0.6 10.7 87.7 1.7 3.0 0.2 4.9
1993-94 8.2 9.7 4.1 3.1 1.0 12.2 95.6 0.4 18.7 1.5 8.6
1994-95 8.3 11.1 4.8 3.1 1.8 13.0 91.7 1.0 18.3 1.5 8.4
1995-96 9.1 12.3 5.0 3.4 1.5 14.0 88.8 1.6 14.9 1.4 6.0
1996-97 8.8 12.6 5.5 2.9 2.6 14.2 91.6 1.2 18.0 1.6 6.5
1997-98 8.7 12.5 5.6 3.2 2.4 14.2 90.9 1.4 15.1 1.3 6.9
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23
Year
Trade Invisibles Current Account Capital Account
Import
Cover of
Reserves
(in months)
E
x
p
o
r
t
s
/

G
D
P

I
m
p
o
r
t
s
/

G
D
P

R
e
c
e
i
p
t
s
/

G
D
P

P
a
y
m
e
n
t
s
/

G
D
P

N
e
t
/

G
D
P

C
u
r
r
e
n
t

R
e
c
e
i
p
t
s
/

G
D
P

C
u
r
r
e
n
t

R
e
c
e
i
p
t
s
/

C
u
r
r
e
n
t

P
a
y
m
e
n
t
s
C
A
D
/

G
D
P

F
o
r
e
i
g
n

I
n
v
e
s
t
m
e
n
t
/

E
x
p
o
r
t
s

F
o
r
e
i
g
n

I
n
v
e
s
t
m
e
n
t
/

G
D
P

1998-99 8.2 11.4 6.2 4.0 2.2 14.4 93.2 1.0 7.0 0.6 8.2
1999-00 8.3 12.3 6.7 3.8 2.9 15.0 93.0 1.0 13.8 1.2 8.2
2000-01 9.9 12.6 7.0 4.9 2.1 16.9 96.4 0.6 14.9 1.5 8.8
2001-02 9.4 11.8 7.7 4.6 3.1 16.9 103.8 0.7 18.2 1.7 11.5
2002-03 10.6 12.7 8.3 4.9 3.4 18.8 106.6 1.2 11.2 1.2 14.2
2003-04 11.0 13.3 8.9 4.3 4.6 19.9 112.8 2.3 23.7 2.6 16.9
2004-05 12.1 16.9 9.9 5.5 4.4 21.9 98.0 0.4 18.0 2.2 14.3
2005-06 13.0 19.4 11.1 5.9 5.2 24.0 94.8 1.2 20.3 2.6 11.6
2006-07 14.1 20.9 12.5 6.8 5.7 26.6 95.9 1.1 23.0 3.3 12.5
2007-08 14.2 22.0 12.7 6.3 6.4 26.8 94.6 1.5 38.3 5.4 14.4
2008-09 15.1 25.5 14.0 6.3 7.7 29.1 91.7 2.6 12.1 1.8 10.3
Note : 1) Current receipt is defined as current account receipts minus official transfer receipts.
Source: Reserve Bank of India

Annexure VI
Indias Foreign Trade - US Dollars
(US $ million)
Year
Exports Imports Trade Balance
Oil Non-Oil Total Oil Non-Oil Total Oil Non-Oil Total
1970-71 11.3 2020.0 2031.3 179.8 1982.5 2162.3 -168.5 37.5 -131.0
1971-72 14.1 2137.8 2151.9 259.8 2181.7 2441.5 -245.7 -43.9 -289.6
1972-73 37.7 2531.0 2568.7 265.9 2167.2 2433.1 -228.2 363.8 135.6
1973-74 15.7 3222.6 3238.3 719.0 3073.6 3792.6 -703.3 149.0 -554.3
1974-75 17.2 4174.9 4192.1 1457.0 4233.6 5690.6 -1439.8 -58.7 -1498.5
1975-76 21.7 4627.0 4648.7 1411.7 4652.0 6063.7 -1390.0 -25.0 -1415.0
1976-77 20.8 5707.6 5728.4 1574.3 4077.4 5651.7 -1553.5 1630.2 76.7
1977-78 18.3 6280.3 6298.6 1806.4 5205.4 7011.8 -1788.1 1074.9 -713.2
1978-79 17.2 6943.1 6960.3 2038.2 6240.5 8278.7 -2021.0 702.6 -1318.4
1979-80 23.3 7903.1 7926.4 4034.7 7255.9 11290.6 -4011.4 647.2 -3364.2
1980-81 31.5 8453.2 8484.7 6654.9 9211.6 15866.5 -6623.4 -758.4 -7381.8
1981-82 246.3 8457.6 8703.9 5786.2 9386.7 15172.9 -5539.9 -929.1 -6469.0
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24
Year
Exports Imports Trade Balance
Oil Non-Oil Total Oil Non-Oil Total Oil Non-Oil Total
1982-83 1278.0 7829.6 9107.6 5816.2 8970.4 14786.6 -4538.2 -1140.8 -5679.0
1983-84 1535.8 7913.6 9449.4 4673.1 10637.8 15310.9 -3137.3 -2724.2 -5861.5
1984-85 1529.4 8348.7 9878.1 4549.8 9862.5 14412.3 -3020.4 -1513.8 -4534.2
1985-86 527.0 8377.5 8904.5 4078.0 11988.9 16066.9 -3551.0 -3611.4 -7162.4
1986-87 321.8 9422.9 9744.7 2199.5 13527.2 15726.7 -1877.7 -4104.3 -5982.0
1987-88 500.4 11588.1 12088.5 3118.1 14037.6 17155.7 -2617.7 -2449.5 -5067.2
1988-89 348.7 13621.7 13970.4 3009.0 16488.2 19497.2 -2660.3 -2866.5 -5526.8
1989-90 418.4 16194.1 16612.5 3767.5 17451.7 21219.2 -3349.1 -1257.6 -4606.7
1990-91 522.7 17622.5 18145.2 6028.1 18044.4 24072.5 -5505.4 -421.9 -5927.3
1991-92 414.7 17450.7 17865.4 5324.8 14085.7 19410.5 -4910.1 3365.0 -1545.1
1992-93 476.2 18061.0 18537.2 6100.0 15781.6 21881.6 -5623.8 2279.4 -3344.4
1993-94 397.8 21840.5 22238.3 5753.5 17552.7 23306.2 -5355.7 4287.8 -1067.9
1994-95 416.9 25913.6 26330.5 5927.8 22726.5 28654.4 -5510.9 3187.1 -2323.8
1995-96 453.7 31341.2 31794.9 7525.8 29149.5 36675.3 -7072.0 2191.7 -4880.4
1996-97 481.8 32987.9 33469.7 10036.2 29096.2 39132.4 -9554.4 3891.7 -5662.7
1997-98 352.8 34653.7 35006.4 8164.0 33320.5 41484.5 -7811.2 1333.1 -6478.1
1998-99 89.4 33129.3 33218.7 6398.6 35990.1 42388.7 -6309.2 -2860.8 -9170.0
1999-00 38.9 36783.5 36822.4 12611.4 37059.3 49670.7 -12572.5 -275.8 -12848.3
2000-01 1869.7 42690.6 44560.3 15650.1 34886.4 50536.5 -13780.4 7804.2 -5976.2
2001-02 2119.1 41707.6 43826.7 14000.3 37413.0 51413.3 -11881.2 4294.6 -7586.6
2002-03 2576.5 50142.9 52719.4 17639.5 43772.6 61412.1 -15063.0 6370.3 -8692.7
2003-04 3568.4 60274.1 63842.6 20569.5 57579.6 78149.1 -17001.1 2694.5 -14306.5
2004-05 6989.3 76546.6 83535.9 29844.1 81673.3 111517.4 -22854.8 -5126.7 -27981.5
2005-06 11639.6 91450.9 103090.5 43963.1 105202.6 149165.7 -32323.5 -13751.7 -46075.2
2006-07 18634.6 107779.5 126414.1 56945.3 128790.0 185735.2 -38310.7 -21010.5 -59321.2
2007-08 26903.8 136228.3 163132.2 79715.0 171939.0 251654.0 -52811.2 -35710.6 -88521.8
2008-09 . . 168704.2 93176.0 194583.4 287759.4 . . -119055.2
Note : Data for 2007-08 are revised and for 2008-09 are provisional.
Source: Directorate General of Commercial Intelligence and Statistics.

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25
Annexure VII
Major Recommendations by Narasimham Committee I
1. Establishment of a four-tier hierarchy for the banking structure consisting of three to four large banks
with SBI at the top.
2. The private sector banks should be treated equally with the public sector banks and the government
should contemplate to nationalize any such banks.
3. The ban on setting up of new banks in the private sector should be lifted and the licensing policy
regarding branch expansion must be abolished.
4. The government has to be more liberal in the expansion of foreign bank branches and also foreign
operations of Indian banks should be rationalized.
5. The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should be progressively brought
down from the levels of 1991-92.
6. The directed credit program should be re-examined and the priority sector should be redefined to
comprise small and marginal farmers, the tiny industrial sector, small business operators and weaker
sections.
7. Banking industry should follow BIS/Basel norms for capital adequacy within three years.
8. Interest rates should be deregulated to suit the market conditions.
9. The government should tighten the prudential norms for commercial banks.
10. The competition in lending between DFIs and banks should be increased and a shift from consortium
lending to syndicated lending should be made.
11. In respect of doubtful debts, provisions should be created to the extent of 100 % of the security
shortfall.
12. The governments share in public sector banks should be disinvested to a certain percentage like in
case of any other PSU.
13. Public sector banks should set up at least one rural banking subsidiary and they should be treated at
par with RRBs.
Source: Compiled From Reserve Bank of India sources

Annexure VIII
Major Recommendations of the Narasimham Committee II
1. The committee favored the merger of strong public sector banks and closure of some weaker banks if
their rehabilitation was not possible.
2. It recommended corrective measures like recapitalization to be undertaken for weak banks and if
required such banks should be closed down.
3. The committee had also suggested an amicable golden handshake scheme for surplus banking sector
staff.
4. Suggesting a possible short term solution to weak banks, the report observed that the narrow banks
could be allowed as a means of facilitating their rehabilitation.
5. Expressing concern over rising non-performing assets, the committee provided the idea of setting up
an asset reconstruction fund to tackle the problem of huge non-performing assets (NPAs) of banks in
the public sector.
6. The report emphasized the need for enhancement of capital adequacy norms from the present level of
8 % but did not specify the amount to which it should be raised.
7. The Banking Sector Reforms Committee further suggested that existence of a healthy competition
between public sector banks and private sector banks was essential.
8. The report envisaged flow of capital to meet higher and unspecified levels of capital adequacy and
reduction of targeted credit.
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26
Annexure IX
The Major Institutional and Legal Measures in the Banking Sector
The major institutional and legal measures undertaken in the banking sector:
1. Debt Recovery Tribunals were established to tackle the issue of high-level non-performing assets
(NPAs).
2. Asset Reconstruction Companies have been allowed to acquire non-performing assets form any
financial entity and restructure and rehabilitate or liquidate them with a stipulated time period.
3. Promulgation of Securitization and Reconstruction of Financial Assets and Enforcement of Securities
Interest (SARFAESI) Act, 2002 and its subsequent amendments to ensure creditor rights.
4. Setting up of Clearing Corporation of India Limited (CCIL) to act as counterparty for facilitating
payment and settlement system relating to fixed income securities and money market instruments.
5. Setting up of Credit Information Bureau of India Limited (CIBIL) for information sharing on
defaulters as also other borrowers.
6. Roadmap for foreign banks and guidelines for mergers and amalgamation of private sector banks
with other banks and NBFCs.
7. Instructions and guidelines on ownership and governance in private sector banks.
8. Setting up of Indian Financial Net (INFINET)
32
as the communication backbone for the financial
sector, introduction of Negotiated Dealing System (NDS) for screen based trading in government
securities and Real Time Gross Settlement System (RTGS).

Annexure X
Reforms in the Banking Sector
Competition Enhancing Measures
Granting of operational autonomy to public sector banks, reduction of public ownership in public
sector banks by allowing them to raise capital from equity markets up to 49 % of paid-up capital.
Transparent norms for entry of Indian private sector, foreign and joint-venture banks and insurance
companies, permission for foreign investment in the financial sector in the form of Foreign Direct
Investment (FDI) as well as portfolio investment, permission to banks to diversify product portfolio
and business activities.
Roadmap for presence of foreign banks and guidelines for mergers and amalgamation of private
sector banks and NBFCs.
Guidelines on ownership and governance in private sector banks.
Measures Enhancing Role of Market Forces
Sharp reduction in pre-emption through reserve requirement, market determined pricing for
government securities, disbanding of administered interest rates with a few exceptions and enhanced
transparency and disclosure norms to facilitate market discipline.
Introduction of pure inter-bank call money market, auction-based repos-reverse repos for short-term
liquidity management, facilitation of improved payments and settlement mechanism.
C. Prudential Measures
Introduction and phased implementation of international best practices and norms on risk-weighted
capital adequacy requirement, accounting, income recognition, provisioning and exposure.
Contd

32
INFINET a sat el l it e-based Wide Area Net wor k (WAN) using VSAT (Very Small Aperture
Terminals) technology, was jointly set up by the Reserve Bank and Institute for Development and
Research in Banking Technology in 1999.
111-073-1


27
Contd
Measures to strengthen risk management through recognition of different components of risk,
assignment of risk-weights to various asset classes, norms on connected lending, risk concentration,
application of marked-to-market principle for investment portfolio and limits on deployment of funds
in sensitive activities.
'Know Your Customer' and 'Anti Money Laundering' guidelines, roadmap for Basel II, introduction
of capital charge for market risk, higher graded provisioning for NPAs, guidelines for ownership and
governance, securitization and debt restructuring mechanisms norms, etc.
D. Institutional and Legal Measures
Setting up of Lok Adalats (peoples courts), debt recovery tribunals, asset reconstruction companies,
settlement advisory committees, corporate debt restructuring mechanism, etc., for quick recovery and
restructuring.
Promulgation of Securitization and Reconstruction of Financial Assets and Enforcement of Securities
Interest (SARFAESI) Act, 2002 and its subsequent amendment to ensure creditor rights.
Setting up of Credit Information Bureau of India Limited (CIBIL) for information sharing on
defaulters as also other borrowers.
Setting up of Clearing Corporation of India Limited (CCIL) to act as central counterparty for
facilitating payments and settlement system relating to fixed income securities and money market
instruments.
E. Supervisory Measures
Establishment of the Board for Financial Supervision as the apex supervisory authority for
commercial banks, financial institutions and non-banking financial companies.
Introduction of CAMELS supervisory rating system, move towards risk-based supervision,
consolidated supervision of financial conglomerates, strengthening of off-site surveillance through
control returns.
Recasting of the role of statutory auditors, increased internal control through strengthening of internal
audit.
Strengthening corporate governance, enhanced due diligence on important shareholders, fit and
proper tests for directors.
F. Technology Related Measures
Setting up of INFINET as the communication backbone for the financial sector, introduction of
Negotiated Dealing System (NDS) for screen-based trading in government securities and the Real
Time Gross Settlement (RTGS) System.
Source: Compiled from Reserve Bank of India Sources

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28
Annexure XI
Evolution of BPLR in India
October 1994
Lending rates for loans with credit limits of over Rs. 2 lakh deregulated.
Banks were required to declare their Prime lending rates (PLRs).
February 1997
Banks allowed to prescribe separate PLRs and spreads over PLRs, both for loan and
cash credit components.
October 1997
For term loans of 3 years and above, separate Prime Term Lending Rates (PTLRs) were
required to be announced by banks.
April 1998 PLR converted as a ceiling rate on loans up to Rs.2 lakh.
April 1999 Tenor-linked Prime Lending Rates (TPLRs) introduced.
October 1999
Banks were given flexibility to charge interest rates without reference to the PLR in
respect of certain categories of loans/credit.
April 2000
Banks allowed to charge fixed/floating rate on their lending for credit limit of over Rs.2
lakh.
April 2001
The PLR ceased to be the floor rate for loans above Rs. 2 lakh.
Commercial banks allowed to lend at sub-PLR rate for loans above Rs.2 lakh.
April 2002
A system of collection of additional information from banks on the (a) maximum and
minimum interest rates on advances charged by the banks; and (b) range of interest
rates with large value of business and disseminating through the Reserve Banks
website was introduced.
April 2003
The Reserve Bank advised banks to announce a benchmark PLR (BPLR) with the
approval of their boards. The system of tenor-linked PLR discontinued.
April 2010 Base Rate System of loan pricing implemented from 1st July 2010
Source: http://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=571
111-073-1


29
Annexure XII
Interest Rate Deregulation - Bank Rate, LAF (Repo-Reverse Repo), CRR & SLR
(%)
Effective Date Bank Rate
Fix Range LAF Rates
Cash Reserve
Ratio
Statutory
Liquidity Ratio
Repo Reverse
29-04-2005 - - 5.00 - -
26-10-2005 - 6.25 5.25 - -
24-01 -2006 - 6.50 5.50 - -
08-06-2006 - 6.75 5.75 - -
25-07-2006 - 7.00 6.00 - -
31-10-2006 - 7.25 - - -
23-12-2006 - - - 5.25 -
06-01-2007 - - - 5.50 -
31-01-2007 - 7.50 - - -
17-02-2007 - - - 5.75 -
03-03-2007 - - - 6.00 -
31-03-2007 - 7.75 - - -
14-04-2007 - - - 6.25 -
28-04-2007 - - - 6.50 -
04-08-2007 - - - 7.00 -
10-11-2007 - - - 7.50 -
26-04-2008 - - - 7.75 -
10-05-2008 - - - 8.00 -
24-05-2008 - - - 8.25 -
12-06-2008 - 8.00 - - -
25-06-2008 - 8.50 - - -
05-07-2008 - - - 8.50 -
19-07-2008 - - - 8.75 -
30-07-2008 - 9.00 - - -
30-08-2008 - - - 9.00 -
11-10-2008 - - - 6.50 -
20-10-2008 - 8.00 - - -
25-10-2008 - - - 6.00 -
03-11-2008 - 7.50 - - -
08-11-2008 - - - 5.50 24.00
08-12-2008 - 6.50 5.00 - -
05-01-2009 - 5.50 4.00 - -
111-073-1


30
Effective Date Bank Rate
Fix Range LAF Rates
Cash Reserve
Ratio
Statutory
Liquidity Ratio
Repo Reverse
17-01 -2009 - - - 5.00 -
05-03-2009 - 5.00 3.50 - -
21-04-2009 - 4.75 3.25 - -
07-11-2009 - - - - 25.00
13-02-2010 - - - 5.50 -
27-02-2010 - - - 5.75 -
19-03-2010 - 5.00 3.50 - -
20-04-2010 - 5.25 3.75 - -
24-04-2010 - - - 6.00 -
02-07-2010 - 5.50 4.00 - -
27-07-2010 - 5.75 4.50 - -
Note :"-" Indicates No change. Source: Handbook of Statistics on Indian Economy 2009-10

111-073-1

3
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111-073-1


32
Annexure XIV
Foreign Investment Inflows
Year
A. Direct Investment B. Portfolio Investment Total (A+B)
Rs. Crore US $ Million Rs. Crore US $ Million Rs. Crore US $ Million
1990-91 174 97 11 6 185 103
1991-92 316 129 10 4 326 133
1992-93 965 315 748 244 1713 559
1993-94 1838 586 11188 3567 13026 4153
1994-95 4126 1314 12007 3824 16133 5138
1995-96 7172 2144 9192 2748 16364 4892
1996-97 10015 2821 11758 3312 21773 6133
1997-98 13220 3557 6794 1828 20014 5385
1998-99 10358 2462 -257 -61 10101 2401
1999-00 9338 2155 13112 3026 22450 5181
2000-01 18406 4029 12609 2760 31015 6789
2001-02 29235 6130 9639 2021 38874 8151
2002-03 24367 5035 4738 979 29105 6014
2003-04 19860 4322 52279 11377 72139 15699
2004-05 27188 6051 41854 9315 69042 15366
2005-06 39674 8961 55307 12492 94981 21453
2006-07 103367 22826 31713 7003 135080 29829
2007-08 138276 34362 109741 27271 248017 61633
2008-09 161481 35168 -63618 -13855 97863 21313
Note : (i) Data for 2007-08 and 2008-09 are provisional.
(ii) Data from 1995-96 onwards include acquisition of shares of Indian companies by non-
residents under Section 6 of FEMA, 1999. Data on such acquisitions are included as part of
FDI since January 1996.
(iii) Data on FDI have been revised since 2000-01 with expanded coverage to approach
international best practices. Data from 2000-01onwards are not comparable with FDI data
for earlier years.
(iv) Negative (-) sign indicates outflow.
(v) Direct Investment data for 2006-07 include swap of shares of 3.1 billion.
Source: www.rbi.org.in.
111-073-1


33
Suggested Readings and References:
1. Mrs. Usha Thorat, Indian Perspective on Banking Regulation, Reserve Bank of India,
February 8, 2010.
2. Mohan, Rakesh, Financial Sector Reforms and Monetary Policy: The Indian
Experience, Lecture delivered at the Conference on Economic Policy in Asia at
Stanford, June 2, 2006.
3. The Economist, Special Report on International Banking May 20-26, 2006.
4. Mohan, Rakesh, Recent Trends in the Indian Debt Market and Current Initiatives,
Reserve Bank of India Bulletin, April 2006.
5. Mohan, Rakesh, Reforms, Productivity And Efficiency in Banking: The Indian
Experience, Reserve Bank of India Bulletin, March 2006.
6. Mohan, Rakesh, Coping with Liquidity Management in India: Practitioner's
View, Reserve Bank of India Bulletin, April 2006.
7. Reddy, Y.V, Global Imbalances-An Indian Perspective, 2006, www.rbi.org.in
8. Reddy, Y.V, Challenges and Implications of Basel II for Asia, 2006, www.rbi.org.in
9. Mohan, Rakesh, Evolution of Central Banking in India, 2006, www.rbi.org.in.
10. Reddy, Y.V. Global Imbalances-An Indian Perspective, 2006, www.rbi.org.in
11. Reddy, Y.V., Challenges and Implications of Basel II for Asia, 2006, www.rbi.org.in
12. Mohan, Rakesh, Evolution of Central Banking in India, 2006, www.rbi.org.in.
13. Mohan, Rakesh (2005), 'Some Apparent Puzzles for Contemporary Monetary
Policy, Reserve Bank of India Bulletin, December 2005.
14. Dr Y V Reddy, Governor of the Reserve Bank of India, at the Institute of Bankers of
Pakistan, Karachi, 18 May 2005
15. McKinsey & Company, Indian Banking 2010: Towards a High Performing Sector New
Delhi, 2005.
16. Mohan, Rakesh, Financial Sector Reforms in India: Policies And Performance
Analysis, Reserve Bank of India Bulletin, October 2004
17. Mohan, Rakesh, Challenges to Monetary Policy in a Globalising Context, Reserve
Bank of India Bulletin, January, 2004.
18. Report on Currency and Finance, 2003-04, Reserve Bank of India, 2004.
19. Ahluwalia, M. S., Reforming Indias Financial Sector: An Overview, Oxford
University Press, 2002.
20. Kapila, Raj & Uma Kapila, Ongoing Developments in Banking and Financial Sector,
vol. 03, 2000.
21. Sen, Kunal, and R. R. Vaidya, The Process of Financial Liberalisation in India,
Oxford University Press, 1997.
22. RBI Annual Report 2004-05. 2005-04, 2006-07, 2008-09
23. Report on Trend and Progress of Banking in India, RBI, various issues

111-073-1

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Indian Financial System

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This case study was written by B Sravana Kumar, IBSCDC, under the direction of D Satish, IBS Hyderabad.

It is intended to be used as the basis for

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