Presented By: Group 2, Section E Anivesh (PGP27270) Anuj Jain (PGP27272) Anurag Singh (PGP27274) Ashish Sethi (PGP27276)

6) Ashwini Saini (PGP27278) Azhar (PGP27280)

Genesis - Credit crunch

Irrational and unsustainable consumption in the west

Greed of the investment bankers Failure of regulating Agencies Fallacious Rating by Rating Agencies

Loans, Bonds or assets were bundled into portfolios or Collateralized Debt Obligations (CDOs) and sold to investors across the globe

US Banks gave high risk loans to people with poor credit histories

Investors suffered losses and hence became reluctant to take on more CDOs Credit markets froze and banks became reluctant to lend to each other

US Home Prices fall 14% in first quarter Rate of unemployment in the United States skyrocketed to 8.9% with the loss of a total of 539,000 jobs US GDP shrunk by 8.1% in the first quarter UK : 5000 business registered for bankruptcy in Q1 IMF : Economic crises cost around $ 4 trillion Germany sees GDP plunge 3.8%, worst drop in 40 years

 Balance Of Payments: Current Account: Balance of trade + Net factor income + Net Transfer Payments Capital Account: A surplus means money is flowing into the country Indias balance of payments in 2008-09 captured the spread of the global crisis to India

 Before the financial crisis excessive capital inflows, increased from 3.1% of GDP in 05-06 to 9.3% in 2007-08 Rupee appreciated from Rs. 46.54 per $ in Aug 06 to Rs.39.37 in Jan 08 Around Jan 08, rupee began a slow decline due to outflow of foreign investments

 Rising oil and commodity prices: Inflation peaked at 12.8% in Aug 08 from 3.1% in Oct07 Contractionary monetary policy during first half of year directed at containing price rise RR increased from 7.75% at the beginning of April 08 to 9.0% in Aug 08 CRR was increased from 7.50% at the beginning of April 08 to 9.0% in Aug 08

 Liquidity enhancing measures increased fiscal deficit from 2.7% in 07-08 to 6.2% in 08-09 Achieved growth rate of 6.7% in 08-09 Switch to expansionary monetary policy to prevent liquidity crunch RR reduced from 9% in Aug 08 to 5% beginning Mar 09 CRR was lowered from 9% to 5.0% from Jan 09

Indias household and corporate saving fuelled the domestic economy at the time when the global liquidity crunch was aggravating the economic downturn in other parts of the globe Gross domestic savings rate has risen steadily from an average of 23% to an estimated high of 35% in the 2006/07 fiscal year (April-March) Ratios of Gross National Savings to GDP also increased during that period

a
Asia suffered from 2 recessions : a domestic one as well as the external one
Shipments of Indian natural pearls, precious and semi-precious stones, and pharmaceutical products, all recorded a decline causing Indian Exports to the US to drop by 22.63% To $5.22 billion in Q1 of 2009

61% of the Indian ITs sector revenue came from US 30% of the industry revenue came from financial services Slowing economy resulted in 70 % of the firms negotiated lower rates with their contractors Estimated 30000 jobs lost Revenue guidance downgrade for major corporates

Factors offsetting the impact Favorable dollar rupee exchange rate Growth de-risking through Europe Growth seeked in non-financial markets

Rupee per US dollar

Decline in foreign exchange reserves held by the Reserve Bank of India Fall in the external value of the rupee, especially vis-vis the US dollar

Sharp decline in sensex from peak levels

BSE movement during the recession

 FDI has been more stable with relatively moderate fluctuations Portfolio investment has been extremely volatile and largely negative
Direct Investment , Portfolio Investment & Total foreign investment from the period april 2007 to june 2009

Indian stock market is still relatively shallow, and FII activities play a disproportionately sharp role in determining the market sentiments

Shows the pattern in aggregate net foreign investment and change in reserves since April 2007. Once again, the two move together
Foreign investment and change in reserves

 Governments supported financial markets US pledged 700 Billion to provide bailouts China pledged 585 Billion dollars to public investment In India Government & RBI worked in close co ordination to manage:Domestic liquidity position Foreign Exchange reserves Policy framework to arrest growth moderation

Regulatory Mechanism in Indian markets saved us from disaster