Read the following passage and answer the items that follow. Your answers to these items should be based on the passage only.
Financial markets in India have acquired greater depth and liquidity over the years. Steady reforms since 1991 have led to growing linkages and its financial system with the global economy. Weak global economic prospects and continuing uncertainties in the international financial markets therefore, have had their 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 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 remains robust, not with standing a decline in capital to risk weighed assets ratio and a raise in nonperforming asset levels in the recent past. Capital adequacy levels remain above the regularity requirements. The financial market infrastructure continues to function without any major disruption. With further globalization, consolidation, deregulation and diversification of these financial systems, the banking business may become more complex and riskier. Issues like risk and liquidity management and enhancing skill therefore assume greater significance.
The Indian financial markets are affected by global changes mainly due to the:
The passage explicitly states that "Steady reforms since 1991 have led to growing linkages and its financial system with the global economy." It further elaborates that "Weak global economic prospects and continuing uncertainties in the international financial markets therefore, have had their impact on the emerging market economies." This indicates that the primary reason for Indian financial markets being affected by global changes is their increasing integration and connectivity with the global financial system.
The passage does not identify an increased inflow of remittances from abroad or an enormous increase in foreign exchange reserves as the main drivers for the impact of global changes on Indian financial markets. While these factors relate to the global economy, the passage specifically highlights "growing linkages and its financial system with the global economy" as the channel for impact.
The contagion of Greece’s sovereign debt problem is presented in the passage as an example or a consequence of these global linkages, affecting financial markets "by way of higher-than-normal levels of volatility." It is a manifestation of the impact, not the fundamental reason why Indian markets are susceptible to global changes in general.