cost financial crices

8/14/2019 Cost Financial Crices

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SUBMITTED TO:

Mrs. NEENA GHONKROKTA

SUBMITTED BY:

VIKAS DOGRA(H-2008-MBA-43)

Department of Business Management

Dr. Y. S. Parmar University of Horticulture &

Forestry Nauni, Solan (H.P.) Pin- 173230


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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, industrialgrowth, oil prices, employment and the companies which are dependent

on the down fall of the US Banks.


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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 subprime 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 all 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.

The International Economic Environment


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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 worlds largest

economy, borrowing heavily on international capital markets rather

than lending, as would seem more natural?

Recent Growth Trends in Indian Economy

Indias 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 Indias 1.1 billion populations 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 nationall 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. Indias

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.


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The industrial sector grew 10.63% in the same period and is now 29% of

GDP. Agriculture is 17% of the Indian economy.

The manufacturing sector has also complemented the countrys

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 percentageof 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

Inflation

GDP Stocks


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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%.

Impact on Indian

economy

Employmen

t

Companies

Industrial

growth

Consumers

Banks

B.P.O


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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 YorkMercantile Exchange (NYMEX) on weaker dollar and worries about

tightening output from OPEC countries.

Foreign institutional investors (FIIs) sold shares worth Rs 831.40 crore


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in August 2008 (till 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.In recent days the FII sold there share which are

now is of 900 crore. And the total amount of share sold of Mutul fund is

aorox.upto 950 crore.thus our sensex is continually facing the up and

down jerks which are still continues

Industrial production:

Falling crude oil prices and improvement in south west monsoon willprovide 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 Indias 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


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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 June2008 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

price affects the fiscal deficit position of the country and its sovereign

rating.

Market men will keenly watch the development of Indias 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 theIndo-US nuclear deal.

Foreign institutional investors (FII)s bought shares worth Rs 1,527.90

in the first few days of August 2008 (till 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 .

Balance of Payments


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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 isas 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


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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

Indias 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

hundreds 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 need to be prepared for loss of business

needless to say the loss of several well paying jobs would dampened


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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 thesame 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 subprime collapse financial cost of these for these


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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 has gone up to 5 times in the past one year. Financing coming

under pressure fees on loans has at least 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 theIndian stock markets react more thanthe US markets and an American financial institution goes burst. Closelook at the extreme volatility off course markets will lead to one to

conclude that the Indian markets provide 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 countrys growth projectiondur 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


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projections of 7.6% & 7.8% respectively. These economies posted the

fastest growth of 9% in nearly two decade in 2007

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


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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 undo the recent damage rupee reversal (the midpoint 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 they said core issues are

addressed yes as rupee appreciates too 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 awayfrom windfall gains and to focus on students risk management practices

to arrest the downside

*****NOTE*****

ALL DATA WRITEN HERE MAY NOT MATCH EXACT DATA

BUT CANNOT BE COMPLETELY DISCARDED AS

DIFFERENT SOURCESS HAS DIFFERENT VIEWS AND

REPORTS..

Conclusion


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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

cost financial crices

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