Ppt on Global Me

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EEP PROJECT REPORT

GLOBAL MELTDOWN:

MACROECONOMIC IMPACT ON INDIA

AANCHAL KHULLAR-801

INDU BHALLA -820

RUCHI ANEJA-828

KUSH JAISWAL

ANKIT GROVER


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SUBPRIME CRISIS

SUB PRIME LOANS are usually classified as those where the

borrower has a credit score below a particular level.

SUB PRIME BORROWERS have a heightened perceived risk ofdefault, such as those who have a history of loan delinquency or

default, those with a recorded bankruptcy, or those with limited debt

experience.

It simply means lending money to sub-prime borrowers, i.e., lendingto people with low or poor credit worthiness


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BASIS OF THE CRISIS

Result of large scale defaults in the US housing market as the banks

went on providing risky loans without adequate security and therepaying capacity of the borrower.

The basic cause of the crisis was largely an Unregulated environment,

Mortgage lending to subprime borrowers

Since the borrowers did not have adequate repaying capacity and also

because subprime borrowing had to pay two-to-three percentage points

higher rate of interest and they have a history of default, the situation

became worse.

But once the housing market collapsed, the lender institutions were the

most affected.

This crisis engulfed the United States in the form of creeping recession

and this worsened the situation


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CAUSES OF SUB PRIME

Growth of the Housing Bubbles

Easy credit conditions

Sub-prime lending

Predatory lending

Deregulation

Increased debt burden or over-leveraging Financial innovation and complexity

Incorrect pricing of risk

Boom and collapse of the shadow banking system

Commodity bubble

Systemic crisis Role of economic forecasting


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IMPACT OF GLOBAL MELTDOWN ON INDIAN

ECONOMY

In India the impact of the crisis has been deeper than what was estimated by

Indias policy makers although it is less severe than in other emerging

market economies.

Impact restricted due to Several reasons:

Indian Banks have no direct exposure to tainted assets and its off-balance

sheet activities have been limited.

Indias growth process has been largely domestic demand driven and its

reliance on foreign savings has been less.

Indias merchandise exports are around 15 per cent ofGDP which is

relatively modest.

Indias comfortable foreign exchange reserves provide confidence to

manage our balance of payments notwithstanding lower exportdemand and dam ened ca ital flows.


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EFFECT OF GLOBAL MELTDOWN ON INDIAN

STOCK MARKET

The economy and the stock market are closely related as the buoyancy ofthe economy gets reflected in the stock market.

Due to the impact of global economic recession, Indian stock market

crashed from the high of 20000 to a low of around 8000 points.

Indian stock market has tumbled down mainly because of the substitutioneffect' of:

Drying up of overseas financing for Indian banks and Indian corporates

Constraints in raising funds in a bearish domestic capital market

Decline in the internal accruals of the corporates.


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EFFECT OF GLOBAL MELTDOWN FOREX

MARKET

In India, the current economic crisis was largely insulated by the reversal of

foreign institutional investment (FII),external commercial borrowings

(ECB) and trade credit.

It caused a reduction in the capital account receipts in 2008-09.

It caused sharp fluctuations in the forex rates

The depreciation of the rupee reflects the combined impact of the global

credit crunch and the deleveraging process underway in Indian forex

market.


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EFFECT OF GLOBAL MELTDOWN ON MONEY

MARKET

The money market consists of credit market, debt market and government

securities market.

The call money rate went over 20 per cent immediately after the Lehman

Brothers collapse.

Banks borrowing from the RBI under daily liquidity adjustment facility

overshot.

NPAs of banks may indeed rise due to slowdown.


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EFFECT OF GLOBAL MELTDOWN ON GDP

In the first two quarters of 2008-09,the growth in GDP was 7.8 and 7.7

respectively which fell to 5.8 per cent in the third and fourth quarters of

2008-09.

The third quarter witnessed a sharp fall in the growth of manufacturing,construction, trade, hotels and restaurants.

The last quarter was an added deterioration in manufacturing due to the

deepening impact of the global crisis and a slowdown in domestic demand.


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EFFECT OF GLOBAL MELTDOWN ON

BALANCE OF PAYMENT

The overall balance of payments (BoP) situation remained resilient in

2008-09 despite signs of strain in the capital and current accounts, due to

the global crisis.

During the first three quarters of 2008-09 (April-December 2008), thecurrent account deficit (CAD) was US $ 36.5 billion as against US $ 15.5

billion for the corresponding period in 2007-08.


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IMPORT-EXPORT

In September 2008, export growth evinced a sharp dip and turned negativein October 2008 and remained negative till the end of the financial year.

Exports have declined due to contraction in global demand due to the

synchronized global recession.

Imports growth also witnessed a deceleration during before turning

negative, the merchandise trade deficit declined during 2009-10.

Export Growth Year Wise


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EMPLOYMENT Adversely affected the Service industry of India mainly the BPO,KPO,IT

Companies & the loss of opportunities for young persons seeking

employment at salaries abroad

According to a sample survey by the commerce ministry 109,513 peoplelost their jobs between August and October 2008, in export related

companies in several sectors, primarily textiles, leather, engineering,

gems and jewellery, handicraft and food processing.


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TAXATIONSeverely dented the Centres tax collections with indirect taxes

bearing the brunt.

Tax-GDP ratio has fallen to 10.95 per cent during current fiscal year

mainly on account of reduction in Customs and Excise Tax due to

effect of economic slowdown.

TAX-GDP RATIO


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RESPONSE TO THE CRISIS

FISCAL RESPONSE

The fiscal stimulus packages and other measures have led to sharp increase

in the revenue and fiscal deficits which, in the face of slowing private

investment, have cushioned the pace of economic activity

The borrowing programme of the government has already expanded

rapidly in an orderly manner by the Reserve Bank of India which would

spur investment demand in the domestic market.

While the government will continue to support liquidity in the economy, itwill have to ensure that as economic growth gathers momentum, the excess

liquidity is rolled back in an orderly manner.


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MONETARY RESPONSE

The RBI has taken several measures aimed at infusing rupee as well as

foreign exchange liquidity and to maintain credit flow to productive sectorsof the economy such as infusing liquidity through interest rate

management, risk management and credit management

Interest rate management

Reduction in the cash reserve ratio (CRR)

Reduction in the repo rate (rate at which RBI lends to the banks)

In order to make parking of funds with RBI unattractive for banks,

the reverse repo rate (RBIs borrowing rate) was reduced

Risk Management

RBI made several changes to the current prudential norms for robust risk

disclosures, transparency in restructured product and standard assets.


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Credit Management

In order to facilitate demand for credit in the economy the Reserve Bank has

taken certain steps such as:

Opening a special repo window under the liquidity adjustment facility for

banks for on-lending to the non-banking financial companies, housing

finance companies and mutual funds.

Extending a special refinance facility, which banks can access

without any collateral.

Allowing corporates to buy back foreign currency convertible

bonds (FCCBs) to take advantage of the discount in the prevailing

depressed global markets.

Expanding the lendable resources available to the Small Industries

Development Bank of India, the National Housing Bank and the

Export-Import Bank of India


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FUTURE OUTLOOK FOR INDIA

Reasons which have helped Indian Economy to remain largely immunefrom the contagious effect of the global meltdown

A sound and resilient banking sector

Well functioning Financial Markets

Robust Liquidity Management

Buoyancy of Foreign exchange reserves

Indian financial markets are capable of withstanding the global shock,

perhaps somewhat bruised but definitely not battered.

India with its strong internal drivers for growth, may escape the worst

consequences of the global financial crisis.


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