The crisis in financial markets has spread at an alarming rate. Though the epicenter of the crisis was the US sub-prime mortgage market, its shockwaves are being felt in financial markets all over the world. As the financial sector is fully integrated with the real economy, the burgeoning crisis in the financial sector poses a threat to the real economy. Macro-economic fundamentals like growth, employment and prices are bound to be affected. The shock has been felt in India’s financial market as well since we are far more exposed to international markets after our macro-economic reforms of 1991. Admittedly, the strength of our banks and other financial institutions coupled with conservative and sound regulation by the Reserve Bank of India has made us better equipped to face this challenge; nevertheless as problems spread to the real economy, policy makers will find their task cut out for them.

The present study will focus on the impact and analysis of the global financial crisis on India’s financial market and the real economy and the desirable monetary and fiscal policy responses to the challenge before us.