Contagion 2007-2009 and its Impact on Indian Fiscal and Monetary Policy

Abstract

The financial crises of 2007-2009 emanating from the sub prime and Alt-A mortgages in US and its CDO’s resulted in a financial contagion which impacted countries across the world, countries which had negligible exposure to the CDO’s derived from sub prime and Alt-A mortgages as India. This financial crises created a seizure in the banking circles thereat at financial intermediation in the nerve centre of Banking industry - London and New York creating cascading effects across the world, roll overs of debts during the seizure period and thereafter became a imploding issue, this created a counter party risk and thus CDS’s prices reached levels as never before, which resulted in the underlining asset crashing and thus feeding into the crises. Governments across the world along with the central banks reacted at levels unprecedented, this stemmed the fall to an abyss but created its own issues, countries balance sheets ballooned on quantitative easing, fiscal imbalances arose thereto. This paper captures the cause of the of the financial crises highlighting the issues which resulted in a financial contagion, It traverses though crises India as a developing country faced and the acts and actions as its government took as fiscal measures and the acts of its Central Bank-RBI through its monetary policy with its available tools more so to infuse liquidity in the system as the core to the problem was of perceived problems of liquidity.