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Global Finanacial Crisis - Impact on Indian Stock Market

Global Finanacial Crisis - Impact on Indian Stock Market

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Published by: meerziyafathali on Dec 25, 2011
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“Global Economical Crisis-Impact on Indian Stock Markets”
Global Financial Crisis of 2008
The global financial crisis of 2008 is a major ongoing financial crisis, the worst of itskind since the Great Depression. – It became prominently visible in September 2008 with the failure, merger or conservator ship of several large United States-based financial firms. The underlying causes leadingto the crisis had been reported in business journals for many months before September,with commentary about the financial stability of leading US and European investment banks, insurance firms and mortgage banks consequent to the sub-prime mortgage crisis.Beginning with failures of large financial institutions in the United States, it rapidlyevolved into a global crisis resulting in a number of European banks' failures and declinesin various stock indexes, and significant reductions in the market-value of equities (stock)and commodities worldwide. The crisis has led to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, whichfurther accelerated the liquidity crisis. World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears, but thecrisis is ongoing and continues to change, evolving at the close of October 2008 into acurrency crisis with investors transferring vast capital resources into stronger currenciessuch as the Yen, the Dollar and the Swiss Franc, leading many emergent economies toseek aid from the International Monetary Fund. The crisis has roots in the sub-primemortgage crisis and is an acute phase of the financial crisis of 2007-2008.“Net Worth Stock Broking Limited”7
“Global Economical Crisis-Impact on Indian Stock Markets”
Sub-Prime Mortgage Crisis
Sub-prime, as the word suggests, is anything that is not prime. In the sub-prime crisiscontext, it simply means lending money to sub-prime borrowers, i.e., lending to peoplewith low or poor credit worthiness. Much thought and energy has already been spent inthe literature in understanding the causes of the sub-prime crisis.To put it very simply, the sub-prime crisis was caused because the lending norms in theUSA were very lax. It is joked about in the academic circles that any man who was noton a respirator was given a loan without any regard to his or her credit-worthiness. Thiswas brought about by the "spend yourself out of the post dotcom bust recession" policyof the American government at that time.The question is whether the American crisis has seen its worst, or will it deepen? The USFederal Reserve Board has cut the interest rates by a steep 0.75 percent on January 22,2009. There is an expectation that the US economy will stabilize as a –result. Will suchmeasures succeed? It is unlikely. They still do not remove the basic weakness of theAmerican economy.The
weakness is in the service sector. Previously the US was leading in software production and new designs, etc. This supremacy is now being challenged by Indiancompanies like TCS, Infosys and Wipro. Many leading companies are transferring their research departments to India because wages are low here. Similar trends can be seen inmany areas like clinical trials, translation, architectural designing, tele-marketing, and publishing and printing. This weakness can only marginally be managed fromdevaluation of the dollar. It is rooted more in the moribund nature of the US educationsystem.The
source of weakness is in the auto-loans and credit cards. Another crisis, likethat in the sub-prime housing sector, is in the making. The present troubles started here.The US Federal Reserve Board encouraged people to take loans to buy houses. Theconsequent demand from the housing sector kept the US economy chugging for aboutthree years. But the borrowers could not repay their housing loans because of decline in“Net Worth Stock Broking Limited”8
“Global Economical Crisis-Impact on Indian Stock Markets”salaries and wages due to international competition. The loans went into default. Banksseized the houses, but had to sell them at much lower prices, and had to book huge losses.A similar crisis is in the making in the auto-loans sector. Car majors are extending loansto borrowers. The loans backed by security of an automobile are considered 'safe', muchlike the sub-prime housing was considered safe. The borrowers are likely to default onthese auto-loans and also credit cards just as they did on housing loans.The
source of weakness is high oil prices. Americans love big and fast cars. Theyhave to import huge quantities of oil to keep them running. This is a big drain on theAmerican economy especially in view of the rising oil prices. The American economy ismore energy intensive than, say, India. They consume more oil per dollar of incomegenerated. Consequently, high oil prices have a greater negative impact on that economy.The adverse impact on India is reduced for another reason. The oil-rich Arab countriesare making grand projects like hotels on artificial islands. The manpower for these projects is supplied in large measure by India. These workers send remittances back home. Thus, part of the money spent by the world in buying Arab oil flows to India. Thenegative impact of high oil prices is partly cancelled by remittances for India but not for America.The
source of weakness is the expenditure that country has taken upon itself byacting as the global policeman. The US is incurring huge expenditures in wars in Iraq andAfghanistan. There seems to be no end to these in sight.
Global Responses
On September 15, 2008, China cut its interest rate for the first time since 2002. Indonesiareduced its overnight repo rate, by two percentage points to 10.25 percent. The ReserveBank of Australia injected nearly $ 1.5 Billion into the banking system, nearly three timesas much as the market's estimated requirement. The Reserve Bank of India added almost$ 1.32 Billion, through a re-finance operation, its biggest in at least a month.In Taiwan, the Central Bank on September 16, 2008, said it would cut its required reserveratios for the first time in eight years. The Central Bank added $ 3.59 Billion into the“Net Worth Stock Broking Limited”9

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