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(opposite Mahima Hotel Bhairidevrakoppa Hubli)
A paper presentation on
Global financial crisis: Is it impacting Indian economy
“Title: direct intervention of the global financial crisis on Indian Economy”
Submitted to: IEMS Tarihal industrial area, Airport road, Hubli Submitted By: Tahemeem .M.Tazeemtark (9986108343) Mukhtar.M. Talwai (9986315786)
The global financial crisis is Indian economy affected Abstract:
The paper is prepared in the head of the topic “the direct intervention of the global financial crisis on the Indian economy”. It mainly concentrate on the general facts which are directly affecting the Indian economy that is what all the financial crisis is about and what are the poising factors affecting the Indian economy like the affect of the inflation, banks, capital market, GDP, balance of payment, industrial growth, oil prices, employment and the companies which are dependent on the down fall of the US Banks.
Introduction What actually is the global financial crisis and how it has occurred
An investment bank uses its propertiory book (own money) tom lend others and invest, it started with the sub prime crisis banks like Lehman, buy mortgage loans from the other bank, and then package them to sell bands against the loan pool often they add cash to make the loan pool more attractive so that the bonds can be sold at higher price. Suppose mortgage was earning 6% these bonds are sold at 4%. The difference is the spread which the invest bank earns by selling these structured banks it raises money and frees capital. But when home buyers started defaulting these bonds lost their value. It all began like this and then virus spreads across the markets al over the world where India is one of the nation affected due to the giant companies of the India invested in huge amount hence the problem persist. (Source: anatomy of global financial crisis ET 17th Sept2008)
The International Economic Environment The International Economic Environment Current Crisis What causes CA deficits and surpluses? The origins of the US trade imbalance Sustainable or Source of Concern? Impact on the $ Impact on firm profits Bernanke: Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets — rather than lending, as would seem more natural?
Recent Growth Trends in Indian Economy
India’s Economy has grown by more than 9% for three years running, and has seen a decade of 7%+ growth. This has reduced poverty by 10%, but with 60% of India’s 1.1 billion population living off agriculture and with droughts and floods increasing, poverty alleviation is still a major challenge. The structural transformation that has been adopted by the national government in recent times has reduced growth constraints and contributed greatly to the overall growth and prosperity of the country. However there are still major issues around federal vs state bureaucracy, corruption and tariffs that require addressing. India’s public debt is 58% of GDP according to the CIA World Fact book, and this represents another challenge. During this period of stable growth, the performance of the Indian service sector has been particularly significant. The growth rate of the service sector was 11.18% in 2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in the same period and is now 29% of GDP. Agriculture is 17% of the Indian economy. Growth in the manufacturing sector has also complemented the country’s excellent growth momentum. The growth rate of the manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The storage and communication sector also registered a significant growth rate of 16.64% in the same year. Additional factors that have contributed to this robust environment are sustained in investment and high savings rates. As far as the percentage of gross capital formation in GDP is concerned, there has been a significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year 2006. Further, the gross rate of savings as a proportion to GDP registered solid growth from 23.5% to 34.8% for the same period.
The poising factors affect the Indian economy
Stocks Inflation Consumers
Impact on Indian economy
Banks Employmen Companies
Consistent increase in the inflation rate:
The market remain under pressure after inflation recorded fastest rise in more than 16 years in early August 2008, increasing the likelihood of the Reserve Bank of India (RBI) raising interest rates again. With no major key events scheduled in the forthcoming week, the market will closely watch global stock market cues. But it may turn volatile on account of expiry of August 2008 derivatives contracts on Thursday, 28 August 2008 The wholesale price index rose 12.63% in 12 months to 9 August 2008, above the previous week's annual rise of 12.44%, government data released on Thursday, 21 August 2008, showed. Inflation for the week ended 14 June 2008 was revised upwards to 11.80% from 11.42%. Rising inflation rate has dashed hopes of any relaxation in the monetary policy. Market expects Reserve Bank of India (RBI) to raise the rates further in its next monetary policy review two months from now.
On 29 July 2008, the Reserve Bank of India (RBI), at its quarterly policy review, raised repo rate by 50 basis points to a seven-year high of 9% to curb inflation and dampen inflationary expectations. RBI also raised the cash reserve ratio (CRR), the proportion of funds that banks must keep on deposit with it, by 25 basis points to 9%. Market will closely watch developments on the Indo-US nuclear deal. A two-day meeting of the 45 countries of the Nuclear Suppliers Group (NSG) began in Vienna on Thursday, 21 August 2008. A green signal by the NSG is required for the deal to proceed to the US Congress for final ratification. As per reports, nuclear supplier nations at a meeting on Thursday, 21 August 2008, proposed conditions for lifting a global ban on fuel and technology exports to India, a step required to implement a US-India nuclear cooperation deal. A further rise in crude oil prices may act as a dampener for the stock markets. Light, sweet crude for September 2008 delivery surged $5.62 to $121.18 a barrel on Thursday, 21 August 2008 on the New York Mercantile Exchange (NYMEX) on weaker dollar and worries about tightening output from OPEC countries. Foreign institutional investors (FIIs) sold shares worth Rs 831.40 crore in August 2008 (till 20 August 2008). FIIs sold shares worth Rs 28,133.40 crore in the calendar year 2008. Mutual funds sold shares worth Rs 886 crore in August 2008 (till 20 August 2008). (source: economy watch Friday august 8, 2008)
Falling crude oil prices and improvement in south west monsoon will provide some relief to investors. Rising inflation remains a major worry for the markets in the medium term. The government will release June 2008 industrial production data at 12:00 IST on 12 August 2008. Reserve Bank of India’s recipe to contain inflation by increasing the lending rates is expected to hurt industry, manufacturing sector and the overall growth
momentum. Industrial production grew at the slowest pace in more than six years in May 2008, at 3.8%, as against 10.6% in the same month of 2007, with manufacturing showing signs of acute deceleration. Inflation remains a major concern for the central bank. Inflation based on the wholesale price index rose 12.01% in 12 months to 26 July 2008, slightly above the previous week's annual rise of 11.98%, government data released on 7 August 2008 showed. Reserve Bank of India (RBI) on 29 July 2008, raised repo rate by 50 basis points to a seven-year high of 9% to curb inflation and dampen inflationary expectations. RBI also raised the cash reserve ratio (CRR), the proportion of funds that banks must keep on deposit with it, by 25 basis points to 9%. The central bank left its reverse repo and bank rates unchanged. Responding to the RBI's monetary tightening, top lenders HDFC and ICICI Bank and a number of state run bank have raised interest rates. The aggregate results of 2,988 companies showed 5.1% rise in net profit to Rs 63,752 crore on 37% rise in sales to Rs 7,64,023 crore in Q1 June 2008 over Q1 June 2007. The net profit growth is now in single digits the lowest in the past 20 quarters. In the June 2008 quarter, a number of companies were hit by mark-to-market (MTM) losses on their foreign exchange (forex) exposure. Crude oil prices have declined sharply from record high $147.27 a barrel hit on 11 July 2008. Oil held near $118 a barrel on Friday 8 August 2008. India imports 70% of its crude requirement. The rising crude oil prices affects the fiscal deficit position of the country and its sovereign rating. Market men will keenly watch the development of India’s nuclear deal with US. The Board of Governor of the International Atomic Energy Agency (IAEA) on 1 August 2008 unanimously adopted the India-specific safeguards agreement, a key step in operationalization of the Indo-US nuclear deal. Foreign institutional investors (FII)’s bought shares worth Rs 1,527.90 in the first few
days of August 2008 (till 7 August 2008). FIIs sold shares worth Rs 25,774.20 in the calendar year 2008, till 7 August 2008. Mutual funds sold shares worth Rs286.10 in the month of August 2008 (till 7 August 2008). Balance of Payments Balance of Payments Anything that we buy or sell to the rest of the world must be paid for. The current account (CA) tracks the flow of goods and services between the US and the rest of the world and Net Exports of Goods and Services, Net Income (from investments and wages) and Net transfers The capital & financial account tracks the payments for those goods & services (KFA) and records the purchase and sale of financial and non-financial assets. It includes Official international transactions which central banks collect as reserves. Investors reaction Most investments conversations in India obsessed about precisely picking the bottom while this may be worthwhile past time for a few professional investors for most others it exposes the exact opposite which is to say they remain under invested when things began to work again. India never did shine as brightly as people thought in 2006 nor is as dull as the people are thinking now the truth is in the middle and there is money to be had for the long term investors in recognizing that.. Impact on the nuclear deal. US administration and the congressed bogged down over the financial crisis in the country.The focus has shifted to bail out the country from the economy turmoil and administration is trying hard to iron out the parameters and specifics of the nearly 1 trillion dollar package that is being put through stabilize frighten markets one of the legislative strategies being discussed recently is that of attaching the financial package to continue in resolution that is needed to fund the government the end of the month. Some are hoping that the civilian nuclear deal will also be attached to this resolution so that the congress can pass one omnibus major prior to its adjournment for the season.
Indian BPO Companies India’s outsourcing story has become the un Intended victim of the collapse of some of the most venerable wall street firms such as Lehman brothers & Meryl lynch since the subprime crisis began to unrevealed idea can no longer claim that the BPO or KPO operation will escape unscathed from troubles of the Us financial sector already hundred of jobs have been lost following the downsizing of the operation and closing down of back offices in India the tall of the collapse of Lehman is reportedly about the 2200 jobs several other global financial services companies to have been force to cut the strength of back office operations in India. Laying of people across various functions as their incomes were hurt by crash of stock market software majors such as TCS Infosys, Wipro & satyam that earn a significant portion of their revenues from the banking. Financial services and insurance sector would njedd to be prepared for loss of business needless to say the loss of several well paying jobs would dampened demand in some product segment as well as the real estate which is already suffering door to the sluggish sales. Indian companies which have partnered this institution for business collaboration or funds would have to be prepared for a change in the partners an even the stake sale by distressed institution. However that is not to say the collapse of the financial sector would make the outlook for India and its market more gloomy their have been a few positive developments over the past couple of weeks for instance the industrial production for july 2008 looks healthier rising 7.1% over the same month last year. In particular the robust growth of the capital goods sector [albeit over a low basin July 2007]and consumer durable [perhaps in anticipation of the festival season of demand] are definitely encouraging the decline in the global commodity prices particularly crude oil now inching close q$90 a barrel should spell good news for inflation control beside the first quarter GDP growth at 7.9% although slows in 3 years. Reflects that the fundamental of the economy still varies from that should inspire confidence in the performance of our stock market.
Banks wants to be safe: Even Indian banks have started tightening the news the noose on the credit most banks have started going slow on proposals and are looking not only at the best possible returns but also at the safety factors because of the sub prime collapse financial cost of these for these banks have also gone up drastically in past few month most Indian banks not tapped the international debt market. Financing cost for the more corporate have gone up to 5 times in the past one year. Financing coming under pressure fees on loans have atleast doubled in the past one year. Most Indians and foreign banks feel that the prices could last till next year and they now want to play safe. Stock market: One often wonders why the Indian stock markets reacts more than the US markets and an American financial institution goes burst. Close look at the extreme volatility off course markets will lead to one to conclude that the Indian markets provides neither adequate liquidity nor value share efficiently. The result is that the very purpose for which exchanges are constituted and shares are listed is defeated low floating stock and low public share holding result in extreme volatility forcing retail investors to shy away from the market. Gross domestic product: Earlier projection of 8% no they are predicting it as 7.4% . the multilateral lending agencies has revised country’s growth projection dur to current global financial turmoil and weekend investment outlook the bank revised its growth projection for the developing Asian economies as a whole to 7.5% this year & 7.2% next year from earlier projections of 7.6% & 7.8% respectively. These economies posted the fastest growth of 9% in nearly two decade in 2007 (source: Asian development bank) Rupee v/s dollar: The issue concerning the rupee exchange rate to the case of either near zero volatility or sudden excessive volatility it is unfortunate that we have never witnessed orderly moves on the exchange rate base on pure economic macro or micro
fundamentals this makes the task of managing the exchange rate risk very difficult for the market participants who run a multicurrency balance sheet having either import or export or foreign currency lending or borrowing ideally, rupee(against dollar) should depreciate by inflation adjusted interest rate differential added to that is the trade gap (on the current account) and net flows through the capital; account (debt & equity) while the inflation adjusted interest differential and the negative trade gap would guide rupee depreciation the flows in the capital account will cushion the rupee depreciation hence flows in the capital account ( through FII/FDI/PE/VC/ECB/FCCB/DR etc) are very critical to guide rupee exchange rate.) the three core issues to be addressed to guide orderly exchange moves are to move in to current account surplus by boosting exports and other receivable to build long term capital account flows to minimize the risk from volatile short term flows and to hedge risk on crude oil prices at appropriate levels to address the said issues rupee exchange rates should remain attractive through exporters should not give exchange rate benefits to short term foreign investors and to reduce volatility in the oil import bill, gradual rupee depreciation by 2-4% per annum will be in order and to undue the recent damage rupee reversal (the mid point of 39 & 47) 43.00 should help the Indian economy. I would look gor the rupee to settle in the range of 43-43.80 by march 2009 with the support of the RBI. Till the said core issues are addressed yes as rupee appreciates to much to 39. now it has depreciated too much at to 47. mainly ion volatility in trade gap and capital account flows it is time for market participants to move away from windfall gains and to focus on students risk management practices to arrest the downside Conclusion The overall analysis of the intervention to the Indian economy by the global financial crisis depicts that this crisis is the end of the beginning still it has long way to go but one good news for the Indian economy is the Indians banks are stable to capitalize the market but together contribution of the factors to the GDP requires some stringent actions from the concerned authorities
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