Passage

Financial markets in India have acquired greater depth and liquidity over the years. Steady reforms since 1991 have led to growing linkages and integration of the Indian economy and its financial systems with the global economy. Weak global economic prospects and continuing uncertainties in the international financial markets have had an impact on the emerging market economies. Sovereign risk concerns, particularly in the Euro area, affected financial markets for the greater part of the year, with the contagion of Greece’s sovereign debt problem spreading to India and other economies by way of higher-than-normal levels of volatility.

The funding constraints in international financial markets could impact both the availability and cost of foreign funding for banks and corporates. Since the Indian financial system is bank-dominated, banks’ ability to withstand stress is critical to overall financial stability. Indian banks, however, remain robust, notwithstanding a decline in capital to risk-weighted assets ratio and a rise in non-performing asset levels in the recent past. Capital adequacy levels remain above the regulatory requirements. The financial market infrastructure continues to function without any major disruption. With further globalization, consolidation, deregulation, and diversification of the financial system, the banking business may become more complex and riskier. Issues like risk and liquidity management and enhancing skills, therefore, assume greater significance.

QUESTION

CSAT

Easy

Comprehension

Prelims 2013

As per above passage, the Indian financial markets are affected by global changes mainly due to:

Select an option to attempt

Explanation

Statement 1 is incorrect. The passage does not mention remittances as a primary factor affecting the Indian financial markets. It primarily discusses broader factors such as global integration and the impact of sovereign risks.

Statement 2 is incorrect. While foreign exchange reserves may influence the stability of financial markets, the passage focuses more on global integration and the effects of international economic conditions. It does not emphasize foreign exchange reserves as the key factor.

Statement 3 is correct. The passage explicitly states that steady reforms since 1991 have led to growing linkages and integration of the Indian economy and its financial systems with the global economy, making this a key factor in the Indian financial markets being affected by global changes.

Statement 4 is incorrect. While the passage mentions that Greece's sovereign debt issue spread to India and other economies, it is discussed as one of the consequences of global uncertainty, not the main reason for the financial markets being affected. This option is partially relevant but does not fully answer the question. Therefore, it is not the best choice.