IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history
Which of the following was a main feature of the effect of the 2008 crisis on India?
India was affected indirectly: foreign institutional investors withdrew funds, exports fell and credit tightened, slowing growth. Banks had little direct subprime exposure, and the RBI responded by easing policy, including cutting rates and the cash reserve ratio to restore liquidity.
- AIndia's banks suffered large direct losses from US subprime securities, causing mass bank failures
- BIndia was largely unaffected because it had no external linkages
- CCapital outflows by foreign institutional investors, falling exports and tighter credit slowed growth, and the RBI eased policyCorrect
- DThe rupee appreciated sharply as foreign funds rushed in
- The RBI raised the cash reserve ratio to cut liquidity
Explanation
Indian banks had limited direct exposure to subprime assets, but India was hit through foreign investor outflows, weaker exports and a liquidity squeeze. The rupee depreciated, and the RBI cut the repo rate and CRR to ease liquidity. So mass bank failures and rupee appreciation are incorrect.
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