EEP PROJECT REPORT

GLOBAL MELTDOWN:
MACROECONOMIC IMPACT ON INDIA
AANCHAL KHULLAR-801
INDU BHALLA -820
RUCHI ANEJA-828
KUSH JAISWAL
ANKIT GROVER
 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 of

default, 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., lending

to people with low or poor credit worthiness
 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 the repaying 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
 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
IMPACT OF GLOBAL MELTDOWN ON INDIAN
ECONOMY
In India the impact of the crisis has been deeper than what was estimated by
India’s 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.

• India’s growth process has been largely domestic demand driven and its
reliance on foreign savings has been less.

• India’s merchandise exports are around 15 per cent of GDP which is

relatively modest.

• India’s comfortable foreign exchange reserves provide confidence to

manage our balance of payments notwithstanding lower export
demand and dampened capital flows.
EFFECT OF GLOBAL MELTDOWN ON INDIAN
STOCK MARKET
• The economy and the stock market are closely related as the buoyancy of
the 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 substitution
effect' 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.
 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.
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.

 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.
 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), the

current account deficit (CAD) was US $ 36.5 billion as against US $ 15.5
billion for the corresponding period in 2007-08.
 EFFECT OF GLOBAL MELTDOWN ON
IMPORT-EXPORT
• In September 2008, export growth evinced a sharp dip and turned negative
in 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

 EFFECT OF GLOBAL MELTDOWN ON
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 people

lost 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.
 EFFECT OF GLOBAL MELTDOWN ON
TAXATION
•Severely dented the Centre’s 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
 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, it

will have to ensure that as economic growth gathers momentum, the excess
liquidity is rolled back in an orderly manner.
 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
sectors of 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 (RBI’s 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.
 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
 FUTURE OUTLOOK FOR INDIA
 Reasons which have helped Indian Economy to remain largely
immune from 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.