Expert Zone

Straight from the Specialists

Asian financial crisis and lessons for India

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Several economists have gone to great lengths to say that India in 2013 is not facing a repeat of the 1991 balance-of-payments crisis or the Asian financial crisis in 1997. Clearly, the crisis India faces now is unique – as most economic crises usually are.

That does not mean there is nothing to be learnt from past crises. We believe there are several similarities between the Asian one and India’s situation today.

There are many reasons and theories attributed to the cause of the Asian crisis. Some of the common factors in the affected countries, in varying degrees, were – high current account deficits, semi-fixed exchange rates, extremely high dependence on foreign capital inflows & borrowings, inefficient asset creation, crony capitalism and undercapitalized banks.

When panic struck, the central banks in the region tried desperately to defend their currencies from depreciating in the face of capital flight. The defence was ultimately unsuccessful and the currencies depreciated between 50 and 80 percent in a few months, busting many large corporates and banks that had direct or indirect foreign exchange liabilities.

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