Controlling the risk: a case study of the Indian liquidity crisis 1990–92

Abstract

Over the period 1990-92, India experienced a foreign exchange crisis complicated by political turmoil that led to three rapid downgrades of its credit rating within the short space of a year. However, India did not default or reschedule its debt and with the help of foreign exchange loans after 44 years of socialism, proceeded with a structural, market-oriented reform of the economy. This crisis differs from the subsequent crises in Mexico, Asia and Russia that followed later in the 1990s in that it did not spread to other countries. The reaction of the international markets was mild. Net flows of private foreign capital remained positive over the crisis period and the three rating migrations increased the country's cost of borrowing by only 1 per cent. The reaction of domestic markets was also positive and by the end of 1991 the local stock market had started an impressive bull run. Thus, the case of India 1990-92 is an interesting study in macroeconomic crisis management with lessons for the future. The crisis was short, damage to investor confidence was minimal, and a turnaround was achieved within three years. This study attempts to examine the crisis, its handling and reaction of the market to downgradings. Copyright © 2003 John Wiley & Sons, Ltd.

Profile of India’s Automobile Industry

“…We called this socialism." (Tharoor 2007: 160) The liberalization phase, triggered by a severe economic crisis in 1990-1991 (Clark and Lakshmi 2003), has been marked by a major shift in the country's overall economic policy framework (Ahluwalia 2002(Ahluwalia , 2006. It has seen India open up its automotive sector considerably with no noteworthy restrictions on domestic competition and few restrictions on foreign competition.…”