Recent Developments in the Global Financial System and Their Impact on India for RBI Grade B Finance
Last updated: 2026-11-13 · MockMentor
"Recent Developments in Global Financial System and its impact on Indian Financial System" is one of the most current topics in the RBI Grade B Finance syllabus. Its content changes every year, so it rewards students who connect static concepts, such as how capital flows or how banks fail, with recent events, such as the failure of Silicon Valley Bank, the rise of stablecoins or India's entry into global bond indices. This chapter gives the background and the main developments, and explains what each means for India.
In one line: since the 2008 crisis, global finance has been reshaped by tighter bank rules, a decade of cheap money followed by sharp rate rises, the end of LIBOR, the growth of private credit and digital assets, and a more fragmented world economy, and each of these reaches India through capital flows, the rupee and its banks.
Basic concepts
- Global financial system: the institutions, markets, rules and currencies through which money moves between countries.
- Capital flows: movement of money across borders for investment, such as foreign direct investment (FDI), foreign portfolio investment (FPI) and external borrowing.
- Contagion: the spread of financial stress from one country, market or institution to others.
- Quantitative easing (QE): large purchases of bonds by a central bank to lower long-term interest rates when policy rates are already near zero. Quantitative tightening (QT) is the reverse.
- Spillover: the effect of policy in one large economy, usually the United States, on others.
- Shadow banking: credit provided by entities outside the regulated banking system, such as money market funds, hedge funds and private credit funds.
- Stablecoin: a crypto token designed to hold a stable value, usually by being backed by US dollars or US government bonds.
Why in News?
- In October 2026, RBI raised the repo rate to 5.50% and adopted a stance of "calibrated tightening", in a setting of rising inflation and global uncertainty.
- India's foreign exchange reserves were around US$ 720 billion in late October 2026, giving a buffer against capital outflows.
- The United States passed the GENIUS Act in July 2025, the first federal law to regulate payment stablecoins. RBI has repeatedly warned that stablecoins pose risks to monetary sovereignty, and the topic was asked in the 2026 RBI Grade B Phase 2 papers.
- Indian government bonds were added to the JP Morgan emerging market bond index from June 2024, and later to Bloomberg and FTSE Russell indices, bringing steady passive foreign inflows.
Evolution of the international monetary system
| Period | System | Main features |
|---|---|---|
| 1870s to 1914 | Gold standard | Currencies fixed to gold; free capital movement |
| 1944 to 1971 | Bretton Woods system | Currencies pegged to the US dollar, the dollar convertible into gold at US$ 35 an ounce; IMF and World Bank set up |
| 1971 to 1973 | Breakdown | The United States ended gold convertibility (the "Nixon shock"); major currencies began to float |
| 1973 onwards | Managed floating and free capital flows | Floating exchange rates for major currencies; capital account liberalisation from the 1980s; repeated crises in emerging economies |
| 1999 | Euro launched | A single currency for most European Union members |
| 2008 onwards | Post-crisis order | Tighter bank rules, central bank activism, stronger role of the G20 and the Financial Stability Board |
The global financial crisis of 2008 and its lessons
What happened
Easy credit and rising house prices in the United States led to a boom in subprime mortgages, given to borrowers with weak credit. These were packaged into mortgage-backed securities and collateralised debt obligations, rated highly by credit rating agencies and sold worldwide. When house prices fell in 2006 and 2007, defaults rose and the value of these securities collapsed. Banks that held them, or that depended on short-term funding, ran into trouble. Lehman Brothers failed in September 2008, money markets froze and the crisis spread across the world.
Causes
- Excessive leverage in banks and investment banks.
- Weak lending standards and the "originate to distribute" model, in which lenders had little reason to check borrowers.
- Complex, opaque derivatives such as credit default swaps.
- Conflicts of interest in credit rating.
- Regulatory gaps over shadow banks.
- Global imbalances, with surplus savings in Asia and oil exporters flowing into US assets.
Impact on India
India's banks had little direct exposure to subprime assets, but the crisis hit through other channels:
- FPIs pulled out about US$ 15 billion in 2008-09, and the stock market fell sharply.
- The rupee weakened from about ₹40 to about ₹50 per US dollar.
- Indian firms could not raise money abroad, and domestic liquidity tightened.
- Exports fell as world demand collapsed.
RBI cut the repo rate from 9% to 4.75%, cut CRR from 9% to 5%, opened special liquidity windows and supported NBFCs and mutual funds. The government added fiscal stimulus. Growth recovered quickly, but the stimulus later fed inflation and a rise in bad loans.
Global reforms after 2008
| Reform | Detail |
|---|---|
| Basel III (2010, finalised 2017) | Higher and better quality capital, capital buffers, leverage ratio and liquidity ratios (LCR and NSFR) |
| Financial Stability Board (FSB, 2009) | Replaced the Financial Stability Forum to coordinate rules among G20 countries; India is a member |
| Systemically important banks | Extra capital and resolution plans for global systemically important banks (G-SIBs) |
| OTC derivatives reforms | Standardised derivatives to be cleared through central counterparties and reported to trade repositories |
| Resolution regimes | Bail-in powers, so that shareholders and bondholders, not taxpayers, absorb losses |
| Dodd-Frank Act (2010) | Major US reform, including the Volcker Rule limiting banks' own trading |
| G20 as the main forum | The G20 leaders' summit became the apex forum for economic cooperation |
Developments of the 2010s
Eurozone debt crisis (2010 to 2012)
Greece, Ireland, Portugal, Spain and Cyprus faced debt crises because of high public debt, weak banks and the lack of an exchange rate to adjust. Bailouts by the European Union, the European Central Bank and the IMF, and the ECB's promise to do "whatever it takes" (2012), ended the acute phase. The lesson was that a shared currency needs shared banking supervision and fiscal support.
Taper tantrum (2013)
When the US Federal Reserve signalled in May 2013 that it would slow its bond purchases, money flowed out of emerging markets. India was among the "Fragile Five" because of its high current account deficit and inflation. The rupee fell to about ₹68 per US dollar. RBI responded with a special swap window for foreign currency non-resident (FCNR-B) deposits, which brought in about US$ 34 billion, and the government curbed gold imports.
Era of low and negative rates
From 2009 to 2021, central banks in advanced economies kept rates near zero and bought trillions of dollars of bonds. Some, such as the ECB, Japan and Switzerland, set negative policy rates. Cheap money pushed investors into riskier assets and emerging markets, and global debt rose to record levels.
The pandemic and after (2020 to 2026)
COVID-19 shock
In March 2020, markets crashed and even US government bond markets froze for a while. Central banks cut rates, bought assets on a huge scale and opened swap lines. Governments spent heavily. The response prevented a financial crisis but left high public debt.
Inflation and the sharpest tightening in decades
Supply bottlenecks, stimulus and the Russia-Ukraine war (2022) pushed inflation in the United States and Europe to 40-year highs. The Federal Reserve raised rates from near zero to over 5% in 2022 and 2023. The US dollar strengthened, and many emerging market currencies weakened. India's RBI raised the repo rate from 4% to 6.5% between May 2022 and February 2023.
Bank failures of 2023
| Event | Cause |
|---|---|
| Silicon Valley Bank (March 2023) | Large losses on long-term bonds as rates rose, and a fast run by uninsured depositors through mobile banking |
| Signature Bank and First Republic Bank | Similar runs on uninsured deposits |
| Credit Suisse (March 2023) | Years of losses and scandals; taken over by UBS in a deal arranged by Swiss authorities, with AT1 bonds written off to zero |
These failures showed that interest rate risk in the banking book and the speed of digital bank runs are real dangers. They also revived the debate on how Additional Tier 1 (AT1) bondholders should be treated relative to shareholders, a question India had already faced in the Yes Bank rescue of 2020.
End of LIBOR
The London Interbank Offered Rate (LIBOR), once the benchmark for trillions of dollars of loans and derivatives, was found to have been manipulated by banks. Regulators replaced it with rates based on actual transactions, such as the Secured Overnight Financing Rate (SOFR) in the United States and the Sterling Overnight Index Average (SONIA) in the United Kingdom. Most US dollar LIBOR settings ended on 30 June 2023. In India, the Mumbai Interbank Forward Outright Rate (MIFOR), which depended on LIBOR, was replaced by the Modified MIFOR, linked to SOFR.
Rise of private credit and non-bank finance
As banks faced stricter rules, lending by non-bank funds grew fast. Global private credit grew to well over US$ 1.5 trillion. Regulators, including the FSB and the IMF, have warned that its links with banks and insurers and the lack of transparency may hide risks.
Trade fragmentation and tariffs
US tariff increases from 2025 and rising geopolitical tension led to "friend-shoring" of supply chains and uncertainty in trade and capital flows. Countries have tried to reduce dependence on a few suppliers, and multilateral rules have weakened.
Digital money and the dollar
Crypto assets and stablecoins
Bitcoin and other crypto assets grew from a niche into a market worth trillions of dollars, with sharp crashes such as the collapse of the exchange FTX in 2022. Stablecoins such as Tether (USDT) and USD Coin (USDC) are used for crypto trading and, increasingly, cross-border payments.
| View | Argument |
|---|---|
| Supporters | Faster and cheaper cross-border payments; programmable money; access to dollars for people in high-inflation countries |
| RBI and many central banks | Risk to monetary sovereignty if people move savings into dollar tokens; capital flight; money laundering; runs if reserves are not safe; no intrinsic value for unbacked crypto |
India taxes gains on virtual digital assets at 30% with a 1% tax deducted at source on transfers, and has brought crypto exchanges under anti-money laundering rules, but has not given them a full regulatory framework. RBI prefers central bank digital currency (CBDC) to private stablecoins.
Central bank digital currencies
Over 130 countries are exploring CBDCs. China's e-CNY and India's e-rupee are among the largest pilots. Projects such as mBridge (linking several Asian and Middle Eastern central banks) and the Bank for International Settlements' Project Nexus (linking fast payment systems, including India's UPI) aim to make cross-border payments faster.
De-dollarisation
The US dollar is still used in nearly 90% of foreign exchange trades and makes up about 57% to 58% of global reserves. But after sanctions on Russia in 2022, several countries have tried to trade in their own currencies, add gold to reserves and build alternative payment links. Central banks bought gold at a record pace from 2022 onwards. India has taken steps to settle trade in rupees, through Special Rupee Vostro Accounts (2022) and local currency settlement agreements with the UAE, Indonesia, Maldives and others.
Impact on the Indian financial system
| Channel | How global events reach India |
|---|---|
| Capital flows | FPIs move money in and out of Indian shares and bonds with global risk appetite and US interest rates |
| Exchange rate | A strong US dollar and outflows weaken the rupee and raise import costs, especially of oil |
| Interest rates | Higher global rates raise the cost of external borrowing and limit RBI's room to cut rates |
| Trade | Global slowdowns and tariffs hurt exports |
| Banking | Indian banks with branches abroad face global funding conditions; global rules such as Basel III shape domestic rules |
| Commodity prices | Oil, gas, fertiliser and edible oil prices feed into inflation and the current account |
| Technology and payments | Stablecoins, crypto and cross-border fast payments create new channels and risks |
India's buffers
- Foreign exchange reserves of around US$ 720 billion.
- A modest current account deficit in most recent years.
- Low short-term external debt and limited foreign ownership of government bonds compared with many emerging markets.
- Well-capitalised banks with low bad loans.
- A flexible exchange rate with RBI intervention to curb sharp swings.
- Inclusion in global bond indices, which brings more stable, rules-based inflows.
Opportunities for India
- Rupee internationalisation, through trade settlement in rupees and the expansion of UPI to other countries.
- GIFT City as a centre for offshore finance currently done in Singapore and Dubai.
- Attracting supply chains moving out of China.
- Leadership in digital public infrastructure, which India promoted during its G20 presidency in 2023.
Challenges
- Volatile capital flows can disrupt domestic markets, even when India's fundamentals are sound.
- High global public debt may lead to new crises in weaker countries.
- Stablecoins and crypto could weaken capital controls and monetary policy.
- Cyber risks grow with the integration of payment systems.
- Climate change creates physical and transition risks for banks and insurers.
- Weakening multilateralism and sanctions can fragment the payment system.
Way forward
- Keep strong macroeconomic buffers: adequate reserves, a moderate current account deficit and fiscal consolidation.
- Deepen domestic bond and equity markets to absorb flows.
- Push rupee trade settlement and UPI links carefully, alongside gradual capital account opening.
- Build a clear policy on crypto assets and stablecoins, in coordination with the G20 and the FSB.
- Strengthen supervision of interest rate risk, liquidity and digital bank runs, using the lessons of 2023.
- Develop green finance and climate stress testing.
Possible exam and interview questions
- How do developments in the global financial system affect India? Discuss with reference to capital flows, the exchange rate and monetary policy. (620 words)
- What lessons did the failure of Silicon Valley Bank and Credit Suisse in 2023 hold for Indian banks and regulators? (420 words)
- What are stablecoins? Why does RBI consider them a risk to monetary sovereignty?
- Explain the reasons for the replacement of LIBOR and its effect on Indian benchmarks.
- Interview: Is de-dollarisation a realistic goal, and should India pursue it?
Related reading: international banking and global markets, foreign exchange market, and international economic issues.
More in Finance
Prepare with MockMentor
RBI Grade A/B 2027 Super-Elite Course (₹7,500) – Complete Phase 1 and Phase 2 preparation with the Descriptive Writing Programme. 365 days validity.