He said the global economic activity was expected to contract by an annualized 6 per cent in the first quarter of 2009 — the same as in the fourth quarter of 2008. Policy making around the world is in clearly uncharted territory. “Governments and Central banks across countries have responded to the crisis through big, aggressive and unconventional measures. The retrenchment from emerging markets is outpacing the overall de-leveraging that is underway, raising serious concerns about refinancing and even default risks," the RBI chief said.

In financial markets, although spreads have narrowed from September 2008 levels, they remain elevated while bank credit has declined and other markets remain impaired. “The estimates of the expected write-downs by banks on global exposures are rising rapidly. For all financial institutions taken together, the expected write-downs over 2007-10 is estimated at $2.8 trillion on US-based assets and $1.4 trillion in Europe and Japan,” he said.

Subbarao said India was prepared to take on its share of responsibility to augment the IMF’s resources and would be able to commit on the extent of participation once the modalities are evolved. “Resources lent to the Fund should be treated as part of the country’s international reserves,” he said. “We call for an early and front-loaded allocation of SDRs (special drawing rights) worth $250 billion which would amount to about three-quarters of the present quota size of the Fund.

This would provide developing countries with additional liquidity of about $100 billion, of which $19 billion will go to low income countries. The RBI chief said there was a need to widen and deepen the market for SDRs through an expansion of the voluntary agreements. An SDR allocation is a reversible measure and the allocation could be re-considered when the global economic situation shows significant improvement. “We support the proposal to utilise the additional income from the investment of the higher proceeds of the agreed gold sale under the New Income Model to expand subsidised lending to low-income countries,” he said.