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

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 Astructural, market-oriented reform of the economy. This crisis differs from the Asubsequent crises in Mexico, Asia and Russia that followed later in the 1990s in that it Adid not spread to other countries. The reaction of the international markets was mild. ANet flows of private foreign capital remained positive over the crisis period and the Athree rating migrations increased the countryʹs cost of borrowing by only 1 per cent. AThe reaction of domestic markets was also positive and by the end of 1991 the local Astock market had started an impressive bull run. Thus, the case of India 1990-92 is an Ainteresting study in macroeconomic crisis management with lessons for the future. The Acrisis was short, damage to investor confidence was minimal, and a turnaround was Aachieved within three years. This Astudy attempts to examine the crisis, its handling Aand reaction of the market to downgradings