India has been affected by the global financial crisis. The deterioration of the global financial environment has affected the national economy and spillover effects on the real economy are still unfolding. India remains vulnerable to the vagaries of the world currency, commodity and financial markets.

Economic uncertainty: The global uncertainty affecting the financial markets and concerns about the global economic outlook have increased the chances of global contagion. Sluggish demand coming from developed economies might affect Indian exports in the coming quarters. However, Indian exports for 2007-2008 exceeded US$ 155 billion. Economic growth in the second quarter of 2008 fell by 1.3% to 7.9%, compared with the same period last year. In the long run, all the indicators for the Indian economy point to sustainability of growth rates: the International Monetary Fund (IMF) prospects for GDP growth for 2008 and 2009 are 7.9% and 6.9%, respectively.

Liquidity management: The Reserve Bank of India adopted several measures to alleviate the pressure on domestic markets – e.g. increasing the borrowing limit from foreign branches from 25% to 50% with a ceiling of US$ 10 million; and cutting the cash reserve ratio (CRR) to 6.5%, which represents an injection of 1 trillion rupees into the market. Under the current environment of high uncertainty and volatility in global financial markets, the Reserve Bank’s active liquidity management will cushion the impact of international financial turbulence and existing measures will be reviewed periodically as the current financial situation evolves.

Inflation: The Consumer Price Index (CPI) climbed to 9% in August, reaching its maximum, from 8.3% in July this year. Commodity prices are slowing down and this helps to ease inflation pressures. To curtail inflation, the government has taken several fiscal measures (e.g. curbing import duty on many agricultural products). Monetary measures, such as the reduction in CRR, will also contribute to curbing the present inflation rate.

Currency: The Indian rupee is depreciating and very volatile: as of October 2008, it depreciated by 24% in the last 12 months. Weakening external demand is likely to affect exports, but the impact might be mitigated by the currency depreciation – exports have grown 35% during the period April-August 2008, compared with the same period last year.

Labour market: Total factor productivity in India has been increasing in the last years, surpassed only by China. India is a labour surplus economy and human resources are an essential component of economic development and competitiveness. 63.3% of the Indian population is between the ages of 15 and 64 and approximately 30% of the population, or 340 million people, is below the age of 15. This segment of the population is expected to decrease by 2015 due to declining fertility rates, reducing child dependency and increasing the percentage of population of working age. Real

estate market: Property markets have been expanding dramatically in the last years, supported by buoyant economic fundamentals. The genuine demand for real estate, supported by a rising middle class, has not been significantly depressed by increasing interest rates so far. A downturn in global economic growth might have an effect on demand, but increasing public infrastructure projects could keep market demand high.

Global crisis: India's dependence on capital inflows to finance its current account deficit is a macroeconomic risk and the global crisis could generate a sharp increase in capital outflows and a reduction in the availability of finance. It could also weaken the balance sheet of the financial institutions, cause a further fall in share and asset prices, and challenge the macroeconomic situation due to shrinking global growth.

Reserves: India has accumulated reserves of US$ 295 billion over the last years of economic expansion, providing a cushion to overcome a potentially pessimistic economic outlook. The level of reserves has decreased recently due to imports paid in US dollars, Reserve Bank intervention and equity portfolio adjustments abroad. The recent fall in commodity prices might help decelerate inflation and could thus benefit the imports bill, while also having a positive impact on reserves.