It has wiped out trillions of dollar in global investor wealth Industries have stated cutting jobs and people are spending lessThe loss of world output in the calendar 2009 is expected to reach U.S $ 2.5 millionlong term implications for developing countriesThe World Bank said in a March 8 report that international economy was likely to shrink for first time bankThe IMF estimates that expected losses and writes down on us assets could total up to $945 billion which is bigger than entire GDP of Australia thus making it the most expensive financial crisis in history.
Initially Insulated: global financial crisis that started in August 2007 with the sub-prime mortgage’ crisis, raised interest rates till July 2008 to cool down a stupendous economy growth rate and control inflationNot forever:credit inflows suddenly stopped, and the interest rates in money market spiked to new highs
Sensex made a high on Jan 21, that is 21000 (all time high). After that it started its downward journey.There were indication of widening subprime crisis in the US and European countries because of fall in prices in the real estate sector which created negative sentiments for the markets.Then there were concerns because of rising crude oil prices which played a significant role in dragging the market downRising inflation had also created negative sentiments for the markets. Because rising inflation forced RBI to intervene which tighten the monetary policy by taking money out of the system.Post official disclosure of recession and Lehman brother collapse there was panic in the markets and FII did huge sell off and withdrew $15bn in the year 2008.After that bad news started to hit the markets one after the other(Mumbai attacks, Satyam fiasco) and situation become more worse.In march 2009 sensex made a closing low of around 8000 because there was uncertainty regarding the upcoming government( election time)After march 2009 the situation started to improve crude oil prices were under control, inflation was also under control and improved sentiments in the global markets lead to surge in the sensexFII again came back on Indian bourses and Indian markets started to improve. Success of UPA in making stable government with clear majority also contributed a lot in improving sentiments in the markets and wooing FII. it was like a confidence booster for the investor. With this retail investor also became bullish and started to invest in the markets Now sensex has reached 17k levels on account major economies being out of recession and GDP growth of last quarter at 7.9%.
Over the span of last 2.5 years exchange rate has been very volatile. Rupee has made a high of 39 Rs per dollar and also made a low of 52 Rs per dollar in early 2009. Both these extreme conditions are undesirable for any country. Central bank always looks for a particular (target) exchange rate.When rupee was very strong i.e. around 39 Rs that was the worst time for export oriented companies for example all the IT/ITes companies balance sheet was bleeding because of less profit margin while India had a advantage because imports were cheap
The major reason for the increase in inflation in 2008 was the rising crude oil prices in the international markets. As India is still dependent on gulf countries for the oil so rising crude oil prices hit India a lot. In India it was demand push inflation not because of less supply.There was huge liquidity in the system which was the reason for the huge demandInflation numbers touched a 13 year high of 12.63. it was not due to domestic factors but actually every country was reeling under the pressure of high inflation. So it was a global phenomenon.
There is fall in exports due to low demand from key market like U.S, European Union and Japan. The foreign exchange reserve has declined from U.S $ 309.7 billion during 2007-2008 to US$ 286.3 billion at the end of September 2008 due to valuation of loss of US$ 20.9 billion.
Significant changes occur only in foreign currency assets due FII inflow and outflow. While the other three gold, SDRs, reserve position in the IMF remains almost sameRecently on November 3 RBI declared to buy 200 metric ton of gold from IMF. This has helped them to diversify their forex reserve. in percentage terms gold % increased from 3.5% to 6.5%.As in the days to come it is expected dollar will remain weak so it is a good decision by RBI to decrease their dependence on dollar and diversify their forex reserve by purchasing gold.Gold is used as a hedge against inflationOverdependence on dollar is not considered good. Because in case dollar depreciates in future then it will adversely affect the real value of forex reserves .Indian should also diversify their foreign currency assets also by increasing their stake in EURO and in other strong currencies of the world.
From the above figures we can see that imports for most of the ports have been relatively stable, this can be attributed to the strong domestic demand that was there during the times of recession. Whereas, if see for exports there is a sharp difference between the forecasted exports and actual exports. Now to have a clearer picture let us look at the trend for overall exports and imports.So, from here also we can see that because of recession there was sharp decrease in exports. On the other part the imports remained relatively stable because of strong domestic demand.
Even accounting for the high base effect the prices for certain commodities have fallen, though there is a regrettable trend in the food prices which have increased35. The decline in inflation should support consumption demand and reduce input costs for corporatesAlso, the decline in global crude prices and naphtha prices will reduce the size of subsidies to oil and fertilizer companies, opening up fiscal space for infrastructure spendingFrom the external sector perspective, it is projected that imports will shrink more than exports keeping the current account deficit modest
The initial responses of the government focused on the financial side of the current crisis, with four major components to the first stimulus package adopted in late 2008: reducing interest rates; increasing access to credit for companies, from both domestic and foreign banking sources; getting state governments and public sector enterprises to borrow more for spending on infrastructure; and providing credit for more consumer spending, especially on automobiles and other durable consumer goods. RBI cut key rates in April 2009 by 25 basis points in a move to infuse more liquidity into the system and stimulate lending growth.
Global meltdown<br />Global investor wealth<br />Jobs and spending<br />Loss of output<br />Implications<br />The IMF estimates<br />
Impact on India<br />Initially Insulated<br />Not forever<br />
Source: Global Financial Crisis: Causes, Impact, Policy Responses and Lessons, Rakesh Mohan, RBI Speech Abstract, April 23, 2009<br />
Financial Sector<br />Indian financial was protected, because of its robust fundamentals. <br />Not even a single bank failed in India.<br />RBI had not allowed total capital convertibility, that helped us <br />
Impact on Stock market<br />: Business World27 November 07, 2009<br />
Impact on Exchange rate<br />Source: advfn.com<br />
Impact of Recession on Inflation<br />Source: Global Financial Crisis: Causes, Impact, Policy Responses and Lessons,<br />Dr Rakesh Mohan, RBI Speech Abstract, April 23, 2009<br />
. Impact on Foreign Exchange Reserve<br />FII<br />current account deficit<br />depletion of foreign exchange reserve <br />depreciation of rupee<br />Exports have fallen to $ 12.8 billion in October 2008 from $ 14.8 billion in October 2007.there is a 60% trade deficit<br />
Reasons for rise in forex reserves<br />Why forex reserves have fallen after june 2008?<br />
Analysis and Recommendation<br />Significant changes in foreign currency <br /> assets .<br />Diversification<br />Diversification of Forex reserves<br />RBI’s action plan <br />GOLD<br />Overdependence on dollar <br />
Forecasting<br /><ul><li> Growth rate for a ‘X’ year = Volume for yr ‘X’ </li></ul> Volume for yr ‘X-1’<br /><ul><li> Average Growth rate = ∑(growth rate over the years) No. of years
Forecasted volume for yr 2008-09 = Volume for yr 2007-08 * Avg. Growth rate</li></li></ul><li>Forecasted data<br />Source of data: www.ipa.nic.in (website of Indian ports association)<br />
Forecasted data<br />Imports<br />Exports<br />Data Source: www.ipa.nic.in (website of Indian ports association)<br />
Impact on GDP<br />. In the first two quarters of 2008- 09, the growth in GDP was 7.8 and 7.7 per cent respectively<br />The growth fell to 5.8 per cent in the third and in the fourth quarters of 2008-09<br />The third quarter witnessed a sharp fall in the growth of manufacturing, construction, trade, hotels and restaurants.<br />Source: http://www.marketoracle.co.uk/images/2009/Dec/India-gdp.png<br />
Caseof the Indian Jewel Industry<br />Of the world’s total export of cut and polished diamonds, the Indian diamond cutting and polishing industry accounts for 95 per cent share in terms of pieces, 80 per cent share in terms of caratage, and 57 per cent in terms of value; 11 out of every 12 diamonds set in jewellery worldwide are cut and polished in India, 90 per cent of the work being done in Surat (Source : GJEPC).<br />In 2008-09 the industry accounted for 19.1 per cent of the total Indian exports, to the tune of US $21.11 billion.<br />No diamond mines exist in India today.<br />the rough stone (raw material) has to be entirely procured as imports.<br />the polished diamond is exported across the world, USA being the major consumer.<br />
Effect of recession …<br />Thousands of such units in Gujarat, India, which cut and polished diamonds mainly for export, had shut down.<br />“Diamond had become as good as stone,” said a middle-aged artisan<br />“Around 6 lakh people lost their jobs from October 2008, following the impact of recession and most of them were from Surat’s diamond and jewellery industry. About 500,000 people lost their jobs in the October-December 2008 period, while over 100,000 were shed in January this year.” The Economic Survey presented in the Indian Parliament on July 3, 2009, reported<br />
Outlook for India<br />Easing out of inflation<br />Global crude prices and naphtha prices<br />Current account deficit <br />“When the winds of change blow, some people build shelters, and some build windmills.” – Chinese proverb<br />
Conclusion<br />In 2008 the RBI reduced the CRR, from 5.5% to 5.0%, it also reduced SLR, from 25% to 24%<br />To lift the economy out of the recession the Government announced a package of Rs 35,000 crores in the first instance on December 7, 2008<br />The combined net market borrowings of the Central and State Governments in 2008-09 were nearly two and half times their net borrowings in 2007-08<br />The flow of foreign exchange deposits in 2008-09 by non-resident Indians to banks has risen by almost 22 times over the previous year to $3.99 billion<br />India is one of the countries who are least affected by the global meltdown, but still some effect was necessarily made because we cannot be immune from it as so many things depends on international trade export and import<br />