This document discusses the Indian stock market reaction surrounding the 2009 Indian general election. It notes that the United Progressive Alliance (UPA) led by the Congress party won a clear majority in the election, removing uncertainty. The market reacted very positively on May 18th, opening over 15% higher and hitting the upper circuit breaker limit, halting trading. It summarizes that the stable UPA government victory provided continuity and confidence for economic policies and reforms going forward.

1. A Joint Venture of Bank Of India & The Bombay Stock Exchange Ltd.

2. BOI SHAREHOLDING LTD.
 Manages Clearing House of Bombay Stock Exchange
(BSE) since 1989.
 A joint venture between Bank of India & BSE.
 Board consists 8 members – 4 each from BOI & BSE,
Chairman & Managing Director of BOI is Chairman of
the Company.
Functions:
 Clearing & Settlement
 Collateral Management for the Exchange.
 Depository Services under CDSL & NSDL Depository.
 Franking & Collection of stamp Duty in the State of
Maharashtra.

3. GENESIS OF GLOBAL
FINANCIAL CRISIS

4.  Monetary Policy in the US and other Western
Countries were eased aggressively after dot com
bubble.
 Policy rates in the US reached 1% in June 2003.
The monetary excess during 2002-06 leading to
Housing Boom.
 Assets prices recorded strong gains. Demand
constantly exceeded domestic output.
 This mirrored in large growing Current Account
deficit over the period.

6.  China/East Asian Countries exporting to USA at low cost leading to
growing surplus.
 Creations of huge Forex Reserves at EMEs.
 The Forex Reserves deployed back in US Treasuries.
 This flood of dollar resulted in sharp rise in US spending.
 Large Global imbalance due to very low interest rate and
accommodative monetary policy.
 Projected global growth in April 2008 at 3.8% down to contract by
1.3%.
 Major advance economies are in recession.
 Global trade volume to contract by 11%

7. Indicator
2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 200
1.Global
Growth 3.7 3.8 4.1 3.9 3.9 3 3.4 0.5 3.4 0.5 3.2 -1.
(a)
Advanced
Economie
s 1.3 1.3 1.7 1.4 1.5 0.5 1 -2 1 -2 0.9 -3.
(b) EMEs 6.7 6.6 6.9 6.7 6.9 6.1 6.3 3.3 6.3 3.3 6.1 1.
2.World
Trade
Volume 3.7 3.8 4.1 3.9 3.9 3 4.1 -2.8 4.1 -2.8 3.3 -1
Table 2:GlobalEconomic Outlook for 2009 (per cent)
Monthof Forecast
Apr-08 Jul-08 Oct-08 Nov-08 Jan-09 Apr-0

8. COMPONENT OF CRISIS
 Crisis roots in USA.
 Sustain rise in Asset prices, lax lending standards in 2002-06.
 Low credit quality.
 Originate Distribute model. Strong growth in complex credit
derivatives.
 Predominately Sub-Prime mortgages sold to financial investors.
 Inflation in USA started to rise in 2004 – so rise in interest rate.
 Housing prices depressed. With low/negligible margin; prime-
borrower encouraged to default.

9.  US regulatory failure, multiplicity of regulators, well over 100
at the federal and state level.
Role of rating agencies.
Default by such borrowing led to losses by financial
institution.
Wiping of significant portion of capital of Banks.
Mounted losses and dwindling net worth led to breakdown of
trust among banks.
Inter-bank money market nearly frozen.
Failure of Lehman Brothers in September 2008.
Complete loss of confidence.
Deep and lingering crisis in global financial market.

10. Implications for Emerging
Market Economy
 Beginning 2003 low interest regime in USA, flight of
capital to EMEs.
 Average flow of USD 285 Billion during 2003-2007.
 Peak of USD 617 Billing in 2007.
 Estimated outflow of USD 190 billion in 2008-09.
 Portfolio and private flows were volatile.
 Substantial accumulation of large forex reserves with
EMEs.
 Constant volatility in capital flows impinges on Exchange
rate movements.

11. Excess Foreign Exchange reserves necessitates sterilisation
and more active monetary policy.
Excess capital flows results boom in Capital Market and
high domestic credit and other assets prices.
Abrupt reversal in capital flows leads to significant
difficulties in economy.
In current financial crisis reversal of capital flow are
quick, leading to contraction of Bank Credit and collapsed
stock prices.
This further leads to banking and currency
crisis, employment and output losses.

13. IMPACT ON INDIA
A . Impact of sub-prime crisis.
 As initial impact of sub – prime crisis, followed by
cuts in US fed fund rates, resulted in massive jump in
net capital in flow.
 RBI sterlize liquidity by increase in cash reserve rates
and through market Stablisation scheme (MSS)
 Policy rates were also raised
 India has limited exposure on complex derivations.
 Lower presence of foreign banks also minimised direct
impact.

14. B. Fiscal Impact
 Govt. did higher expenditure on account of higher crude
price, subsidies, debt waiver scheme in 2008-09.
 Fiscal deficit doubled from 2.7% of GDP in 2007-08 to 6%
in 2008-09.
 Net Market borrowing trebled from Rs. 130 billion to Rs.
329.65 billion.
 Standard is Poor downgraded its outlook on long term
sovereign rating from stable to negative

15. C. Impact on Real Economy
 Slowdown in external demand, reversal of capital
flow, growth in Industrial production decelerated to 2.8% in
2008-09 from 8% previous year.
 Service sector remained largely in effected with growth of
9.7% in 2008-09 as against 10.5% in previous year.
 Real GDP growth slowed down to 6.7% in 2008-09 as
against 9%.
 Rupee dollar rate under pressure. Rupee depreciated.
 Slowdown in Exports.
 Reduced credit take off.

16. Impact on Capital Market
Index Movement in last one year

17. Impact on Exchange Rates

18. Impact on yield on 10 years Government Bond

19. ACTION BY CENTRAL BANK
 Cash Reserve Ratio brought down to 5% in January 2009
from 9% (September 2008) injecting Rs. 1600 billion is
primary liquidity.
 Statutory liquidity ratios brought down, opening of
refinance windows, refines to SIDBI and EXIM banks
 Repo and Reverse Repo rates are cut down from 9% to
4.75% and 6% to 3.25% respectively.
 MSS operations were reversed Balance Rs. 860 billion end
March 2009 against Rs. 1754 billion at May 2007.

20.  Various monitory and liquid measures released liquidity
of Rs. 4900 Billion since mid September 2008 (about 9%
GDP)
 Banks were advised to step up lending to core sectors.
 Banks were advised to bring down BPLR.
 Restriction on interest rate to bulk deposits.
 Restrictions loosened on External commercial borrowing
by corporates.

21. Full but gradual opening of current account.
Foreign investment flows are encouraged.
External commercial borrowing is subject to ceiling and end
– use restrictions.
Macro ceiling stipulated on portfolio investment in Govt.
Securities and Corporate Bonds by FIIs.
Imposition of prudential limits on Banks, such as inter-bank
liabilities, borrowing and lending, money market, assets
- liability Management for both on and off balance sheet terms.
STRENGTH OF INDIAN
FINANCIAL SECTOR

22.  Implementation of Based II ……. Minimum 9%
CRAR.
 CRAR of all scheduled commercial banks at 13% at
end March 2008.
 Single factor stress tests reveal that Banks can
withstand shocks on account of change in credit
quality, interest rates and liquidity conditions.
 Strict prudential norms towards income recognition,
Asset classifications and provisions by the Banks.

23. WHY THE INDIAN
FINANCIAL SECTOR
WEATHERED THE STORM
 Negligible direct exposure to toxic assets which
contaminated Western Banking System.
 Banks credit quality remained high.
 Credit Growth apx. 30% during 2004-07.
 RBI tightened prudential norms CRR at 13% at March
2008 end against regulatory requirement of 9%.
 Net NPA at 1% of net advance and 0.6% of assets.

24. LESSONS
 Central Bank should adopt a broader macro-prudential
views of asset price movements, credit boom and the build
up of systematic risk.
 Asset price bubble leads to strong credit growth such as real
estate and stock market.
 Only substantial hike in policy rates can pick the bubble.
 Pre-emptive action like hike in risk weights and provision
norms for Banks.

25.  Sharper focus on liquidity risk management, risk
transmission.
 Global imbalances are to be reduced to a manageable
proportion.
 US needs to save more & export more.
 Asian Countries have to consume more, export less.

26. STABILITY BEYOND EXPECTATIONS.
INDIA GENERAL ELECTION
MAY 2009.

27. PRE-POLL CRITICAL ISSUES
 Global Financial crisis.
 Rajor-thin majority Government.
 Melt down in Capital Market. Sensex touching a low
of 8160 in April 2009, down from a peak of 20728, a
fall of 61%.
Weakening economy. Rising job losses in export
sector.
 General Election in May 2009. Political Uncertainty
 Formation of 4 front – UPA led by Congress, NDA
led by BJP, Third Front – led by Left Parties.
 No coalition likely to get majority

28. INDIAN ELECTIONS 2009
 India, world’s 7th largest Country. Area 3.2 million sq.km.
 Population more than 10.1 billion.
 Religion – Hindu – 80.5%, Muslim – 13.4% (3rd largest)
 Estimated voters 714 million.
 Election duration – 1 months in 5 phases – 16 April to 13th
May 2009.
 Number of polling stations 687402
 Number of Seats – 543
 National parties 9
 Regional parties 24

29. PRE – POLL MARKET SENTIMENTS
 Either UPA or NDA form the Government. Both are
seen market friendly.
 Market on upward swings since chances of Left
Parties (3rd Front) were remote.
 Market may show higher volatility if there is a
fractured verdict.
 Sensex rises 300 points on the eve of election.

30. ELECTION RESULTS 2004 - 2009
YEAR 2004 2009
UPA 220 262
NDA 185 157
OTHERS 137 17
III FRONT -- 80
IV FRONT -- 27
TOTAL 542 543

31.  Major News Paper Headlines / Views
 Finally a free hand
 Decisive vote for growth.
 The Indian economy is set to maintain its growth.
 Stable Government to put the confidence laid to all time
high.
 A strong Government, influence of the Left Parties
disappeared.
 With clear mandate there is a certainty in terms of policies.
POST – POLL MARKET
SENTIMENTS

32.  The Congress will have the last word in issues of
Government .
 Smooth transition of Government.
 Economy will be the main priority of the Government.
 Congress is a pre reform party.
 The Congress will unlock long awaited reforms.

33. STABILITY - KEY AGENTS
 Strong United Progressive Alliance (UPA) led government
allows continuity in policies.
 Smooth transition – this is more like an extension of UPA’s
term. IN the event of any other party / alliance coming to
power, it would have taken some time for the new government
to formulate its policies.
 UPA to continue with its policies with more power in hand
now, no fear of strange coalitions or drag of the communist
parties anymore.
 Economic reforms may speed up. FDI inflows into the country
over the next 6-12 months can improve as India gets to play a
larger role in G20.

34.  Government is likely to continue to boost credit to support
growth.
 Rural focus and reforms to speed up.
 Disinvestments – Pressure on fiscal position will push the
government for disinvestments, though moves are unlikely
to be very aggressive.
 Infrastructure – Focus on low-cost housing and power
generation.
 Focus on rural populace: Improve access to rural credit at
lower interest rates;
 Subsidise food for poor; implementation of NREGA;
develop rural infrastructure.
 Marching of reforms in financial sector in particular
banking and insurance.

35. ACTION AT DALAL
STREET
 May 15, 2009 - Previous Day Sensex at 12173.
 May 18, 2009 -Market opened at 9.55 A.M. at 15% high
 Circuit Breaker applied. Trading halted to 1 hour.
 Market re-opened at 11.55 A.M. at 20% high.
 Circuit Breaker applied. Market Closed for the day.
 Sensex closed at 14284.

36. Sensex For The Month May 2009
0.00
2000.00
4000.00
6000.00
8000.00
10000.00
12000.00
14000.00
16000.00
Sensex
18/05/09
15/05/09
(14296)
(12173)

37.  There Were five days in which Circuit breaker had been
applied by the exchanges in the history.
 The upper circuit filter was placed only once i.e on 18th
may 2009.
Market Wide circuit Breaker in the
Indian Stock Market

38. TradeDate High Low Close
Previous
Close %Change
17-May-04 5020.89 4227.5 4505.16 5069.87 -16.62
22-May-06 11142.9 9826.91 10481.77 10938.61 -10.16
17-Oct-07 18841.29 17307.9 18715.82 19051.86 -9.15
22-Jan-08 17068.57 15332.42 16729.94 17605.35 -12.91
18-May-09 14284.21 13479.39 14284.21 12173.42 17.34
TableV –Incidence ofMarketWide CircuitBreakerInIndianStockMarket
16884.09 -2272.93
Opening
Points
(Increase
5020.89 -842.37
13479.39 2110.79
11071.63 -1111.7
18037.9 -1743.96

39. Trade
Date
Market Wide Circuit
Breaker
Reason
17-May-04 10% MWCB applied at
about 10:15, trading halted
for 1 hour. On resumption of
market after one hour at
about 11:15, MWCB
triggered on 15% circuit and
trading halted for another 2
hours.
BJP government
lost power
22-May-06 10% MWCB applied at
11:56, trading halted for 1
hour.
Confusion
regarding tax
circular.

40. Trade
Date
Market Wide Circuit
Breaker
Reason
17-Oct-07 MWCB applied at 9:56, trading
halted for 1 hour.
Restrictions on
Participatory notes
22-Jan-08 MWCB applied at 9:56, trading
halted for 1 hour.
Financial crisis (realty
melt down)
18-May-09 MWCB applied at 9:55 (opening
index) on a day for 2 hours
(15%), subsequent to election
result in favour of Congress
government.market re-opened at
11:55 and MWCB applied for
20%, market halted for rest of the
day
General Election
Result in favour
of UPA

41. THANK YOU