affectofuseuropeandownturnonindianstockmarket-111005085049-phpapp01

8/11/2019 affectofuseuropeandownturnonindianstockmarket-111005085049-phpapp01

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Presented By

Piyush Chawala

Sukant Prusty

Anurag Nath

Satish Naik

Manjushaa

Hemanth Kumar


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Downturn in the world economy

Causes

Housing Slump Subprime Mortgage Crisis

Financial Innovation

Impacts

Bank Failures

Home Foreclosures

Federal Reserve Steps in

Changes in the Market

Events

Bear Stearns Bailout Northern Rock/Bank of

England

Countrywide

Solutions The Federal Reserve has tried

to take corrective measures

Regulation

Problems with Regulation


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Housing Boom Housing prices were on the rise

People bought and built more and more

Thought it was a good investment

Thought that home values would not decrease

Took out second mortgages to use toward consumerspending

Housing Bust Excess inventory

Housing price correction

Negative equity

Foreclosures


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Where did the subprime mortgage crisis start? Banks used to operate on a fractional reserve

system

Today almost no reserve is required due to new

rules that the public doesnteven know about Banks are able to issue more loans when they do

not have to keep a reserve on hand

When they run out of qualified candidates, they

reduce the requirements, which leads to subprimemortgages

These loans slowly inflate the system, and createwealth that is not real


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Mortgage originators sold the loans on the

secondary market

No risk for the originators so little effort went

into analyzing the borrowersability to repay

High risk and debt tolerance

Adjustable Rate Mortgages (ARMs)

Rates are beginning to increase from the low

introductory rate


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Financial innovation is the act of creating and

then popularizing new financial instruments

as well as new financial technologies,

institutions ,and markets.

Adjustable Rate Mortgages

Investment Vehicles that went wrong

Mortgage Backed Securities (MBS)

CDOs Collateralized debt obligations

Not understood by investors


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Financial innovations are optimal responses to

various problems or opportunities

Many financial innovations that have been

created in the recent past to respond to the

financial boom were not fully understood

They were not adapted properly from the past,

and when the financial sector crashed, theseinnovations responded negatively


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Expense $3.8trillion income $2.3trillion

To meet deficit he borrows money in forms bondsinstruments or even foreign government.

Total loans and interest adds up $14 trillion

Pays money of interest by loans. reduce spendingor raise taxes

Call federal reserve ,create and deposit dollars.


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Dollar value reduced inflation

Overseas manufacturing recession

Lead to stagflation

The day has come where the us can no longer

buy pay bills.


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European debt crisis


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The European Union introduced the euro on January 1, 1999.

It benefited countries such as Portugal, Italy, Ireland, Greece

and Spain (together now known as the PIIGS)

Before introduction of Euro, they borrowed money at interest

rates much higher than the rates at which a country like

Germany borrowed.

When they started to use the euro they could borrow money at

interest rates close to that of Germany, which was economically

the best managed country in the EU


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The rest of Europe, in effect, used Germany's credit rating

to indulge its material desires. They borrowed as cheaply

as Germans could to buy stuff they couldn't afford

Inflation in the PIIGS countries was higher than the rate

of interest.

It means that, if the borrowing rate is 3 per cent while

inflation is 4 per cent you're effectively borrowing for 1

per cent less than inflation.


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Since the start of the financial crisis ECB has bought, $80 billionof Greek , Irish ,Portuguese Govt bonds and lent another $450

billion to various European Govts and banks accepting

virtually any collateral, including Greek Govt bonds

Germany ECB rescue fund. In case of Greece, a lot of

German and French banks which have lent money will be in

trouble if Greece defaults

The German Govt gives money Rescue Irish government

Give money to Irish banks repay their loans to the German

banks


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When a country prints currency in huge quantities, the currency

will not remain of any real value.

So the citizens moneygold or will continue using the euro.

People at the same time demanding their money back. Will

lead to a lot of banks collapsing.

Investors anticipating that their claims on the Italian

government would be redenominated into lira would shift into

claims on other euro-area governments, leading to a bond

market crisis


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Admission of Greece to the euro in the 1stplace.

ECB acceptance of Greek bonds as collateral

Despite high debt & deficits.

Investors charged near-zero spreads

Failure to send Greece to the IMF in early 2010.

Refusal to think about the likely

need for restructuring of the debt.


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The crisis in the European and American economies

(any economy) impacts other economies via three

channels:

- Trade channel

- Financial channel

- Confidence channel


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When an economy falls into a recession, it impactsthe affected countrystrading partners too.

Falling household and business demand in the

slump-hit economy hits the exports/imports of itstrading partners.

The share of exports to EU (excluding UK) and

imports from EU has fallen over the years.

In 1987-88, exports to EU constituted about 18.6% of

total exports. This has declined to 17.5% by 2010-11.


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The impact of turmoil in one economys financial

markets is not merely transmitted to other markets,

the quantum and direction of the movement is also

more or less similar (decline in equity markets, rise incorporate bond spreads and depreciation in currency).

This is because cross border financial linkages have

increased substantially over the years. Besides, the

correlation between assets too has been rising across

the world.


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Apart from movement in financial markets, four kinds of

financial flows could impact Indian financial markets:

1) Foreign Direct Investment:

There are many American and European

companies which have investments in India. So,

there has been a slowdown in FDI in India. Already there has been a fall in FDI to 138462

crores in 2010-11 from 179059 crores in 2009-10.


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2) Foreign Institutional Investment

With a turmoil in global financial markets, FII inflowswill decline.

We have a large number of global financial firmswhich operate across the world and in case of a declinein one major market, there is a pull out from othermarkets as well.

FIIs pulled out nearly Rs 2,000 crore from the stock anddebt market in September 2011, the second consecutivemonth in which overseas capital outflows were greater thaninflows.


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3) External Commercial Borrowings

External commercial borrowings could also

decline if the European crisis spreads to other

economies.

ECBs declined in the first stage of the crisis as

well.

Already there has been a drop in the ECBsbecause of the fall in rupee.


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4) Remittances and NRI deposits The deposits increase in the crisis periods Oct-Dec 2008

and Jan- Mar 2009 and decline thereafter.

It could be that NRI preferred to invest higher proceeds

in India seeing crisis in their own economies. In case ofremittances, we see a decline in crisis period Oct 08

Mar 09 but see improvements as crisis eases.

There were huge concerns of remittances collapsing

because of the crisis. In some countries they did collapseworsening poverty status.

In India, despite the decline it manages to remain in

positive.


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This channel shows confidence declines in business andhouseholds seeing the global uncertainty.

So even if an economys macroeconomic conditionsand outlook look favorable, the decline in confidence

can disrupt the economic conditions. Decline in confidence is also one of the reasons for

decline in business investments which led to decline inoverall Indian GDP growth.

Credit growth also declined because of decline inbusiness investments.

RBI Governor Mr Subbarao has stressed on this channelon numerous occasions


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Apart from these three channels, Indian economy hasbecome more global over the years.

The business and trade cycle of India has started to followthe cycles of advanced economies.

RBI Executive Director Deepak Mohanty in his speech explainedthe increasing correlation:

With increased global integration, the Indian economy now issubject to greater influence of global business cycles. Thecorrelation between the cyclical component of the index ofindustrial production (IIP) of the advanced economies andIndia has risen to 0.50 during the period 1991-2009 from 0.20in during the period 1971-1990


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If the debt crisis spreads to other nations in Europe and theirbanking systems, European entities could start repatriatingfunds from Indian stock markets.

In recent years, some Indian conglomerates initiated orincreased their stakes in American and European companies.

There could be decline of exports of goods and services toEurope and through the reduction of revenues or loss incurred

from European-related operations of these companies.

The macro-economic impact could have a more severe effecton the Indian economy than the financial impact byrepatriation of foreign funds.


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The euro zone crisis could trip the fundraising plans of Indian companiesat home and abroad and dent confidence, while eurosweakness will

hurt exporters selling in the currency.

Analysts fear the crisis in the euro zone would impact equity marketsworldwide, including India, and companies may be forced to defer

fundraising plans.

Meanwhile, a weaker euro is worrying exporters.

India's chief economist Kaushik Basu is of the view that the debt crisis in

Europe may turn advantageous for the country's capital markets. This

is because foreign investors would look to park their money in safe

havens.


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"An argument is made that there are just too

many question marks about the near future;

wouldn't it be better to wait until things clear up

a bit?...face up to two unpleasant facts: Thefuture is never clear [and] you pay a very high

price for a cheery consensus. Uncertainty actually

is the friend of the buyer of long term values."

- Warren Buffett


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The World Sinks!

Sensex Fallsby 387 points or 2.2%

DATE SENSEX

04

August

17693

05August

17305


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Staying true to the age-old saying that 'when America sneezes,the world catches a cold', the stocks markets across the globe on

Friday plunged deep into red after an overnight crash in the US

bourses.

The Dow tumbled 512 points -- its ninth deepest point drop ever -- as fear about the global economy spooked investors.

In India, the stock market plunged deep into red on worries over

a possible recession in the US with the benchmark Sensex crashing

by over 700 points at one time to slip below 17,000 level.

Economic Affairs Secretary R Gopalan attributed day's fall in

markets to panic-like situation among investors due to negative

news flow about the US economy.


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Fears take Lions Share

Sensex Fallsby 315 points or 1.8%

DATE SENSEX

05

August

17305

08

August

16990


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Fearful investors reacted to the United States losingits coveted AAA credit rating

Standard & Poor's downgrade of the US sovereign

debt rating triggered a flight from risky assets inglobal stock markets.

"If the global economic situation worsens then therewill be a flight to safety and money will be pulled

out from all the markets including India," - DipenShah, head of private client research group atKotak Securities


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Dalal Street gets a stimulus on Bernankes NOSensex rockets 567 pts on fed qe rejection

Sensex Risesby 567 points or 3.6%

DATE SENSEX

28

August

15848

29August

16416


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US Fed refrained from announcing another stimulus Investors were relieved that Americascentral bank

has stopped short of launching a third bond buying

programme, known as Quantitative Easing (QE)

It could have increased the flow of money into

commodities and emerging markets, including

India, stoking inflation.

The RBI on Monday unveiled the much awaiteddraft normson new banking licences that will allow

corporates to set up banks. Shares of non-banking

finance companies jumped after the announcement


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Investors fret as stocks heads for weak end, Sensexsheds 199 points in worsening global crisis, Rs

breaches 50 as RBI refuses to intervene

Sensex fallsby 199 points or 1.2%

DATE SENSEX

22

September

16361

23

September

16162


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Global Policymakers tries to calm the market

Rupee reached to a 28 month low of 49.90/$

Corporates and Bank want RBI to intervene in

the Forex market to stop the free fall of Rupee.

RBI deputy governor Subir Gokarn told very

narrow objective of smoothening what

might be a very volatile market situation,

nothing beyond that

Rupee Down due to global dollar scarcity.


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Date Sensex %Change

4thJanuary 2010 17558 --

3rdJanuary 2011 20561 +17%

30thSeptember

2011

16453 -20%

Sensex

YTD July to Date Year to June

952.17 978.45 654.74

Dow

YTD July to Date Year to June

504.63 646.31 287.99

Deviation


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Sensex rose 623 points , biggest gain in 22 months,From 17823.4 to 18446.5


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The reason behind this rise was

Governments lower-than-expected fiscal deficit

estimate for 2011-12

The government pledged to contain fiscal deficitin 2011-12 at 4.6% of GDP compared with 5.1% in

2010-11

But the rising crude oil prices raise doubts on whether the

government would meet its budget shortfall target, so

the investors were a bit sceptical.


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The reason for this drop

European markets fell sharply amid

deepening fears of major global economies,

including the US dipping into recessionagain

Renewed Eurozone debt crisis also dragged

the index down


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SENSEX ended the day 513.19 points higher at18,240.68


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Reasons Greece won the consent of international

lendersfor a five-year austerity plan intendedto avoid looming bankruptcy

Its prime minister pledged to push radicaleconomic reforms through parliament.

JPMorgan and Goldman Sachs slashed

forecasts for crude prices in the third quarterafter the International Energy Agencyannounced the release of 60 million barrels of

oil


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The SENSEX continued to fall and closed at 16745.35


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Investors feared a Greek default within weeks after

International lenders told Greece on Monday thatit must shrink its public sector and improve tax

collection to secure a vital 8 billion euro rescuepayment

Greece's prime minister cancelled a US trip tochair an emergency cabinet meeting at home

German Chancellor Angela Merkel suffered aregional election loss

EU finance ministers also failed to make progresson the debt crisis


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The BSE Sensex shot up 354 points to cross the17k mark to reach 17099.28


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The reasons Hope of weakening rupee would boost earnings of

the IT companies and a firm global trend Infosys, rose

by 3.22% and TCS gained3.94%

Greece expected to clinch the release of a 8 billion

euro ($11 billion) aid that it needs to avoid running

out of cash next month.

S&P downgraded its rating on Italy by one notch toA/A-1 but European Central Bank buying Italian debt

also aided the sentiment.

Britain's FTSE was up 1.22 percent at 5,323.93 points


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SENSEX crashed 704 points to 16,361-its biggestsingle-session loss in over two years


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The events that led to the rise are

Hope of euro zone officials would act to corral Greece'sdebt woes and prevent another banking crisis.

The parliaments of Finland and Germany were set tovote on the approval to extend the powers of the eurozone rescue fund considered critical to bailing outEuropesweak economies.

The new plan was to leverage the 440-billion rescue

fund, known as the European Financial StabilityFacility (EFSF), to help struggling European nationsavert debt defaults

A positive opening at European markets also helped

buying sentiments.


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Movement of FTSE and


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Movement of FTSE and

SENSEX


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The slow pace of financial reforms taking inIndia

Cautious approach towards permitting foreign

investments in Indian business sectors Bureaucratic hurdles & regulatory constraints

Indian companies have major outsourcing

deals with American & European companies. Indias export to US and European countries

has grown substantially in the past few years.


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Full but gradual opening of current account. Capital account and financial sector: More

calibrated approach towards opening up.

Equity flows encouraged Debt flows subject to ceilings and some end-

use restrictions.

Capital outflows: progressively liberalized

External commercial borrowing is subject to Strictrules and regulations.


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Macro ceiling stipulated on portfolio investment inGovt. Securities and Corporate Bonds by FIIs.

Imposition of prudential limits on Banks, such asinter-bank liabilities, borrowing and lending, money

market, assets

Implementation of Basel II.

Banks credit quality remained high.

Less percentage of NPA .


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