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History – 1991 india economic crisis

In 1985, India had started having balance of payment problem. By the end of 1990, it was in a
serious economic crisis.The government was close to default, it central bank had refused new credit
and foreign exchange reserves had reduced to such a point that India could barely finance three
week’s worth of imports. India had to airlift its gold reserves to pledge it with International
Monetary Fund (IMF) for a loan.

The crisis was caused by currency overvaluation; the current account deficit and investor confidence
played significant role in the sharp exchange rate depreciation.

The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980’s.
During mid eighties, India started having balance of payment problems. Precipitated by Gulf War,
India’s oil import bill swelled, exports slumped, credit dried up and investors took their money out.
Large fiscal deficits, over time, had a spillover effect on the trade deficit culminating in an external
payments crisis. By the end of1990, India was in serious economic trouble.

The caretaker government in India headed by prime Minister Chandra Sekhar’s. Immediate response
was to secure an emergency loan $ 2.2 billion from the International Monetary fund by pledging 67
tons of India’s gold reserves as collateral The Reserve Bank of India had to airlift 47 tons of gold to
the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.
National sentiments were outraged and there was public outery when it was learned that the
government had pledged the country’s entire gold reserves against the loan. The move helped tide
over the balance of payment crisis, jolting the country out of an economic slumber.

SCOPE FOR NBFC’S (Non-Banking Financial Company )

The Indian NBFC sector plays a very important role in financial intermediation in the country,
accounting for around 9-10% of the total financial assets in the system and their fundamental
importance to the country’s development is set to continue. However going forward the situation is
likely to be a lot more challenging as the NBFC sector seeks to grapple with the twin issues of

 Diminishing competitive advantage (weaker barriers to entry) and

 Greater regulatory pressures.

Going forward one is likely to see a greater influx of banking players within the NBFC
territories and unless the NBFC player can diversify their product offerings and tap newer markets
their competitive advantages will diminish.

The RBI is looking to bridge the regulatory gap between banks and NBFCs and non deposit
taking NBFC and deposit taking NBFCs and this increasing cost of regulation will affect profitability
and impose constraints on the business model of NBFCs



The Indian gold market is a market that has grown at an impressive pace and is still currently
brimming with opportunities. While since FY02 till FY10 the gold stock in india is estimated to have
grown at a CAGR (Compunded Annual Growth Rate) of 34-40% (It is estimated that in FY11 alone
the country imported 900-100 tonnes of gold ) there is every reason to believe that these rates can
be sustained or even bettered going forward. The World Gold Council believes that gold demand in
the country will continue to grow at 30% in real terms driven by urbanization, rapid GDP growth,
burgeoning middle class incomes and sustained and potentially rising savings rate of 35-40%