Key Differences in Policy Response: India vis-à-vis the Advanced Countries

There were, however, some key differences between the actions taken by the Reserve Bank of India and the central banks in many advanced countries:

1. In the process of liquidity injection, the counter-parties were banks unlike non-banks in case of advanced economies. Even liquidity measures for mutual funds, non-banking financial companies (NBFCs) and housing finance companies were largely channeled through the banks.

2. There was no compromise on collateral standards for injecting liquidity. Unlike the mortgage securities and commercial papers in the advanced economies, the range of collaterals was not expanded beyond government securities.

3. Despite large liquidity injection, the Reserve Bank’s balance sheet did not show unusual increase because of release of earlier sterilised liquidity.

4. Availability and flexible use of multiple instruments facilitated better sequencing of monetary and liquidity measures.

5. The use of pro-cyclical provisioning norms and counter-cyclical regulations ahead of the global crisis helped safeguard financial stability.

6. Fiscal stimulus was geared to address deficiency in aggregate demand rather than supporting the financial sector as was the case in advanced economies.