The major objective of the present study is to analyse the impact of financial sector reforms in India during 1990s on the development of its financial system and assess the possible vulneralibility of the Indian economy to financial crisis as it integrates into the world economy. The Indian financial system is found to have integrated itself, though mildly, with the rest of the world in terms of trade flows, flow of foreign capital and interactions on the stock markets. There is evidence of financial development in India with financial liberalisation and integration. The capital market is also found to have developed fast. Several determinants of vulnerability have been identified. Major factors / indicators of vulnerability include slow growth of real GDP, external indebtedness, high inflation rate, deteriorating current accounts, real exchange rate appreciation and public sector deficits. Other factors included deteriorating currency exposure, lending booms, weak quality of bank portfolios, and financial sector weaknesses. The results show that the economy is quite strong in terms of low inflation rate, reasonably good growth rate of GDP, large foreign exchange reserves and sufficient control and supervision over its financial system. At the same time, the study reveals that the current account deficit as a percentage of GDP is rising and is likely to rise further on account of the rising import bill of crude oil. Total fiscal deficit of the government (including the Centre and States) as a percentage of GDP is very high as per the international norms. Export growth has declined drastically in the last two years. Although it has picked up since the financial year 1999-2000. Saving rate has not increased in the recent past and the ratio of hot money to the foreign exchange reserves has crossed the danger level of 60 percent. Thus, the results provide a mixed picture of the Indian economy.
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