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Why Is India Relatively Unaffected by the Financial Crisis?

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Why is India Relatively Unaffected by the Financial Crisis?

IMF has said that output growth in India slowed from 7-8% in 1994-96 to 5.5% in 1997-98. The slowdown was mainly due to domestic factors, particularly the stalling of the structural reform process and the deterioration in government finances, rather than the regional crisis. India was a relatively closed economy - exports comprised only about 8% of GDP, with only about 13% of exports directed to the rest of Asia (excluding Japan). So the adverse effect of the crisis on the balance of payments and domestic activity was relatively modest.

Capital controls, while entailing longer-term costs, appear to have helped to limit India's vulnerability to abrupt movements in short-term capital. Net inflows of private capital during 1992-96 averaged only 1.5% of GDP in India, compared with 8.8% in Thailand, 10.5% in Malaysia, and 4.8% in Indonesia. Although longer-term inflows were adversely affected by the regional turmoil, as well as the sanctions that followed nuclear tests in May 1998, India's limited dependence on foreign capital, as well as the $4.2 billion issue of Resurgent India Bonds to nonresident Indians in late 1998, helped to cushion the impact.


2. The Evolution of Asian Currencies During the Financial Crisis

The Asian financial crisis started with the devaluation of Thailand's Bath, which took place on July 2, 1997, a 15 to 20 percent devaluation that occurred two months after this currency started to suffer from a massive speculative attack and a little more than a month after the bankruptcy of Thailand's largest finance company, Finance One. This first devaluation of the Thai Baht was soon followed by that of the Philippine Peso, the Malaysian Ringgit, the Indonesian Rupiah and, to a lesser extent, the Singaporean Dollar. This series of devaluations marked the beginning of the Asian financial crisis. [2] This first sub-period of the currency crisis took place between July and October of 1997. Figures 1A and 1B (below) present the monthly evolution of the currencies of the eight South-East Asian countries studied here for the period July 1997 (rebased to 100 in all the graphs) to May 1, 1998. [3] Included are the Hong Kong (H.K. Dollar), Indonesia (Rupiah), Malaysia (Ringgit), the Philippines (Peso), Singapore (SG Dollar), South Korea (Won), Taiwan (New Dollar) and Thailand (Baht).

A second sub-period of the currency crisis can be identified starting in early November, 1997 after the collapse of Hong Kong's stock market (with a 40 percent loss in October). This sent shock waves that were felt not only in Asia, but also in the stock markets



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