Events in the Financial Sector

The global economy is reeling with the impact of the

ongoing recession which started with the sub-prime

crisis in the United States and found its way to other

developed and emerging economies of the world.

This recession has its roots in the initial collapse of

the financial sector. However, in a world that is more

integrated within each country as well as across nations,

the events in the financial sector have eventually trickled

down to the real sector of the economies as well.

Finance and financial markets play a dominant role

in growth and development of modern economies -

hence, any recovery from the current recession must

be couched in an overall recovery of the health and

performance of the financial sector.

In the absence of mature financial markets in their own

economies, several emerging economies (including

India) have heavily depended on credit and other

financial services from the western financial markets.

Therefore, any form of failure in these markets has a

direct effect on the markets in emerging economies.

The concerns relating to the US slowdown and its

intensity have mounted in view of the potential spill over

on to the global economy. With tightening in lending

standards, deterioration in asset quality and deceleration

in consumer loan demand, events in the financial

markets are beginning to have a persisting impact

on the real economy as well, with direct slowdown

in employment and growth in several economies

across the world. Terms-of-trade losses due to soaring

commodity prices have not only reduced the capacity

of a re-balancing of the world economy but have also

adversely impacted several countries. Although the

Emerging Market Economies (EMEs) are exhibiting

resilience until now, the eventual depth and width of the

impact