To focus on the study of examine “U.S. financial crisis and its impact on India affecting by macroeconomic factors.”

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  • 1. CH:-1 INTRODUCTIONDifferent countries or regions, like the Eurozone, U.S.A., and India use differentcurrencies. These currencies generally float against each other, meaning that their relativeprices are set by traders on foreign exchange markets, although sometimes they are fixed(meaning just that the central bank acts on the market to keep its exchange rate where itwants it). Changes in exchange rates are normal and are driven by a number of factors,such as interest rates in different countries: a higher interest rate creates demand for acurrency, and as with most things higher demand leads to a higher price meaning thatcurrency has greater value. More generally, a currency’s value should be related to thelong-term attractiveness of the economic opportunities available in that currency.There is no exact definition of a financial crisis, but it generally involves a rapid fall inthe value of one or more currencies. It is more likely to happen in an emerging marketeconomy that has borrowed a lot of money in foreign currency. For E.G. If I’m a bigIndian institutional investor, I may not want to buy bonds denominated in Americandollar, because I don’t know what the dollar will be increasing in the future, but I may bewilling to buy bonds denominated in dollar. v What is financial crisis?A situation in which the value of financial institutions or assets drops down rapidly. Afinancial crisis is often associated with a panic or a run on the banks, in which investorssell off assets or withdraw money from savings accounts with the expectation that thevalue of those assets will drop if they remain at a financial institution.In financial crisis mainly three things happens. 1. Investors withdraw their money from savings accounts 2. An economy of country may falls down. 3. A stock market may crash down.
  • 2. A financial crisis is defined as speculative pressures in the foreign exchange markets. Toidentify periods of a currency crisis, we need to identify both successful and unsuccessfulspeculative attacks on domestic currency. The basic idea is that when there arespeculative runs on currency, the government has three policy choices. 1. Government can make exchange rate depreciate. This is successful currency attack since the monetary authority gives up a pegged exchange rate system after a series of speculative attack. 2. Government can intervene in the foreign exchange markets by selling international reserves. 3. It can be increase interest rates to increase capital flows to decrease speculative pressure on domestics currency and marketSome countries may use a combination of these three policy options to absorb speculativepressures or attacks. History itself is a witness of major financial crisis European Monetary System(EMS) crisis 1192-1993, the Mexican crisis in 1994–1995 (which is spread to a numberof South American countries), and the Asian crisis in 1997–1998. CH:-2 Review of literature 1. The impact of global financial crisis on India’s Gross Domestic Product (GDP) is investigated upon in an aggregate demand framework using quarterly data for the period from Q2 of 1996 to Q1 of 2010. GDP, consumption expenditure, capital formation and export were found to be co-integrated. Co-integration estimation re- affirms that domestic consumption remains the key driver of India’s GDP growth. Our analysis establishes thatthough India’s trade sector dwindled and investment
  • 3. activity declined in the aftermath of global financial crisis, its GDP growth slackened only marginally as domestic consumption provided the necessary buffer in limiting the adverse impact of global financial crisis on the Indian economy. -Raj Rajesh, SanjibBordoloi (2008)2. The turmoil in the international financial markets of advanced economies that started around mid-2007 has exacerbated substantially since August 2008. The financial market crisis has led to the collapse of major financial institutions and is now beginning to impact the real economy in the advanced economies. As this crisis is unfolding, credit markets appear to be drying up in the developed world. With the substantive increase in financial globalization, how much will these developments affect India and other Asian emerging market economies (EMEs)? India, like most other emerging market economies, has so far, not been seriously affected by the recent financial turmoil in developed economies. In my remarks today, I will, first, briefly set out reasons for the relative resilience shown by the Indian economy to the ongoing international financial markets’ crisis. This will be followed by some discussion of the impact till date on the Indian economy and the likely implications in the near future. I then outline our approach to the management of the exposures of the Indian financial sector entities to the collapse of major financial institutions in the US. Orderly conditions have been maintained in the domestic financial markets, which is attributable to a range of instruments available with the monetary authority to manage a variety of situations. Finally, I would briefly set out my thinking on the extent of vulnerability of the Asian economies, in general, to the global financial market crisis. -Global Financial Crisis and Key Risks Impact on India and Asia Rakesh Mohan (October 9, 2008)
  • 4. CH:-3 RESEARCH METHODOLOGY v PROBLEM STATEMENT:To focus on the study of examine “U.S. financial crisis and its impact on Indiaaffecting by macroeconomic factors.” v RESEARCH QUESTIONS: 1. How the U.S. financial crisis affects Gross Domestic Products (GDP)? 2. How the U.S. financial crisis affect balance of payment (BOP)? 3. Is Foreign Direct Investment (FDI) and foreign Institutional Investment (FII) is affected by U.S. financial crisis? 4. What policy is followed by the government while financial crisis (Indian)? v RESEARCH OBJECTIVES : 1. To know the effect of financial crisis on FII and FDI. 2. To know how financial crisis affect the GDP and BOP. v LIST OF INFORMATION NEEDED: 1. Data of balance of payment since 2007 to 2012. 2. Data of GDP growth rate from 2007 to 2012. 3. Data of FDI and FII from 2007 to 2012. 4. Data of American stock market indices (Dow Jones) needed from 2007 to 2012. v Hypothesis: H0 1: There is no relationship between Dow Jones and NSE indices. H1 1: There is significance relationship between Dow Jones and NSE indices. H0 2: There is no relationship between GDP and BOP. H0 2: There is significance relationship between GDP and BOP.
  • 5. v VARIABLES:A. Independent variables: 1. American Stock market (Dow Jones)B. Dependent variables: 1. GDP (Gross Domestic Product) 2. BOP (Balance Of Payment)C. Interdependent variables : 1. FDI (Foreign Direct Investment) 2. FII ( Foreign Institutional Investment)v RESEARCH DESIGN: For this research researcher used the ‘Descriptive Research Design’, as name suggests; the main objective is to describe the situation of global financial crisis and its impact on India .At this stage the researcher builds some idea about sampling methods.v DATA COLLECTION 1. That data are collected from various website for making concept very clear. 2. The period of data collected is from year 2007 to 2012. 3. This period is selected for the study because at least 5 years data are required for understanding the relationship between the variables. 4. The data collected are of interval scale.
  • 6. ¸ Analysis of secondary data computing following tools: Multiple Regression Analysis, multiple co-relations Analysis. The reasons for applying the above tests are: A. The data are interval in nature. B. There is 1 dependent, 2 independent and 2 are interdependent variable. To know the predictability of dependent variables from independent variablev DATA ANALYSIS PLAN: Data will be analyzed using SPSS (Statistical Package for Social Sciences) package v 16.0 by IBM. The data analysis tools applied here are Multiple Regression Analysis.v SCOPE AND BENEFITS OF THE STUDY: 1. This study seeks to provide the information of financial crisis which occurs in 2008. 2. It is found that whether the macroeconomic factors influence the crisis or not.v LIMITATIONS TO THE STUDY: 1. There are many other factors which affect the financial crisis. In this report the researchers have just taken six factors namely Balance of Payment, GDP, FII, FDI, Export and Imports. 2. Time, money, energy are scarce resource and hence major constraints. 3. Due to lack of experience on researcher’s side, there is a possibility of human error. 4. The findings and suggestion is may be relevant with time. 5. We have considered American stock market as only Dow Jones not any Other.
  • 7. Ch4:- DATA ANALYSIS AND INTERPRETATION 1. Multiple Correlation:- Descriptive Statistics Mean Std. Deviation NDOW_JON_OP_IND 1.143648E 1.6817835E3 70 4NSE_op_IND 4.831928E 857.1231783 70 3FDI_IN_USD 2.81E4 13495.149 6FII_IN_RS 4.013337E 6.7897178E4 6 4GDP_IND 7.550 2.0226 6bop_QTR_ind - 1.049083E 9.1191496E3 21 4
  • 8. Correlations DOW_JON_O NSE_op_I FDI_IN_US P_IND ND D FII_IN_RS GDP_IND bop_QTR_indDOW_JON_OP_IND Pearson ** ** 1 .539 -.548 -.407 -.169 .677 Correlation Sig. (2-tailed) .000 .260 .423 .750 .001 N 70 70 6 6 6 21NSE_op_IND Pearson ** .539 1 -.493 -.733 -.328 -.104 Correlation Sig. (2-tailed) .000 .321 .098 .526 .655 N 70 70 6 6 6 21FDI_IN_USD Pearson -.548 -.493 1 -.195 -.131 -.196 Correlation Sig. (2-tailed) .260 .321 .711 .804 .710 N 6 6 6 6 6 6FII_IN_RS Pearson -.407 -.733 -.195 1 .644 .265 Correlation Sig. (2-tailed) .423 .098 .711 .168 .612 N 6 6 6 6 6 6GDP_IND Pearson -.169 -.328 -.131 .644 1 .618 Correlation Sig. (2-tailed) .750 .526 .804 .168 .191 N 6 6 6 6 6 6bop_QTR_ind Pearson ** .677 -.104 -.196 .265 .618 1 Correlation Sig. (2-tailed) .001 .655 .710 .612 .191 N 21 21 6 6 6 21**. Correlation is significant at the 0.01 level (2-tailed).Interpretation: The above table shows correlation between variables. Dow Jones isstrongly correlated with NSE (0.539) indices and BOP (.0677) and negatively correlatedwith FDI (0.-548), FII (-0.407) and GDP(-0.169).
  • 9. 2. Multiple Regression: c Model Summary Adjusted R Std. Error of theModel R R Square Square Estimate a1 .169 .028 -.214 2.2290 b2 .363 .131 -.448 2.4335a. Predictors: (Constant), DOW_JON_OP_INDb. Predictors: (Constant), DOW_JON_OP_IND, NSE_op_INDc. Dependent Variable: GDP_INDInterpretation: The above table shows linear regression equation according to abovesummery table model 2 is the best for predicting the dependent variable because in model2 R and R square is grater then 1st model. 3. Anova: c ANOVAModel Sum of Squares df Mean Square F Sig. a1 Regression .581 1 .581 .117 .750 Residual 19.874 4 4.968 Total 20.455 5 b2 Regression 2.690 2 1.345 .227 .809 Residual 17.765 3 5.922 Total 20.455 5a. Predictors: (Constant), DOW_JON_OP_INDb. Predictors: (Constant), DOW_JON_OP_IND, NSE_op_INDc. Dependent Variable: GDP_INDInterpretation: The above table shows the analysis of variance that the significancevalue of both models is 0.750 and 0.809 that is more than 0.5 so that it is fail to acceptH01.
  • 10. Findings 1. There is strongly positive relationship between Dow Jones, NSE indices and BOP and negative relationship between FII, FDI and GDP with respect of Dow Jones as independent variables which mean increase or decrease of one variable affected to other. 2. The multiple Regression model used for predicting the dependent variable that is GDP (GROSS DOMESTIC PRODUCT) so that in model 2 the value of R and adjusted R is high so model 2 is best. 3. The ANOVA table shows that the significance level of model 1 (0.750) and model 2 (0.809) both are higher than0.5 so we fail accepting the H0 1 that is there is no relationship between Dow jones and NSE indices. ConclusionIndia is now fastest growing country but India’s economy was fall down in2008 financial crisis when majority of foreign institutional investment (FII)was driven out after the receiving 17.7 billion dollars net equity investmentinflow in 2007.This was the most probably reason for crashing economy is major financialinstitution of America is registered bankruptcy. After the crashing Indianeconomy are stabilized and able to receive growth rate (GDP) of 6.77 in2009, 10.09 in 2010 and 7.2 in 2011.But it is now around 5 to 6 % in 2012 due to Eurozone sovereign debt crisis.It’s affected by declaration of export, current account deficit. Government ofIndia is takes action to fulfill the deficit by attracting foreign investors.