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Department of Business Management

Dr. Y. S. Parmar University of Horticulture &
Forestry Nauni, Solan (H.P.) Pin- 173230

The paper is prepared in the head of the topic “the direct intervention
of the global financial crisis on the Indian economy”. It mainly
concentrate on the general facts which are directly affecting the Indian
economy that is what all the financial crisis is about and what are the
poising factors affecting the Indian economy like the affect of the
inflation, banks, capital market, GDP, balance of payment, industrial
growth, oil prices, employment and the companies which are dependent
on the down fall of the US Banks.

What actually is the global financial crisis and how it has


An investment bank uses its propertiory book (own money) tom lend
others and invest, it started with the subprime crisis banks like Lehman,
buy mortgage loans from the other bank, and then package them to sell
bands against the loan pool often they add cash to make the loan pool
more attractive so that the bonds can be sold at higher price. Suppose
mortgage was earning 6% these bonds are sold at 4%. The difference is
the spread which the invest bank earns by selling these structured banks
it raises money and frees capital. But when home buyers started
defaulting these bonds lost their value. It all began like this and then
virus spreads across the markets all over the world where India is one of
the nation affected due to the giant companies of the India invested in
huge amount hence the problem persist.

The International Economic Environment

The International Economic Environment Current Crisis What causes
CA deficits and surpluses? The origins of the US trade imbalance
Sustainable or Source of Concern? Impact on the $ Impact on firm
profits Bernanke: Why is the United States, with the world’s largest
economy, borrowing heavily on international capital markets — rather
than lending, as would seem more natural?

Recent Growth Trends in Indian Economy

India’s Economy has grown by more than 9% for three years running,
and has seen a decade of 7%+ growth. This has reduced poverty by 10%,
but with 60% of India’s 1.1 billion populations living off agriculture and
with droughts and floods increasing, poverty alleviation is still a major
The structural transformation that has been adopted by the national
l government in recent times has reduced growth constraints and
contributed greatly to the overall growth and prosperity of the country.
However there are still major issues around federal vs. state
bureaucracy, corruption and tariffs that require addressing. India’s
public debt is 58% of GDP according to the CIA World Fact book, and
this represents another challenge
During this period of stable growth, the performance of the Indian
service sector has been particularly significant. The growth rate of the
service sector was 11.18% in 2007 and now contributes 53% of GDP.
The industrial sector grew 10.63% in the same period and is now 29% of
GDP. Agriculture is 17% of the Indian economy.
The manufacturing sector has also complemented the country’s
excellent growth momentum. The growth rate of the manufacturing
sector rose steadily from 8.98% in 2005, to 12% in 2006. The storage
and communication sector also registered a significant growth rate of
16.64% in the same year
Additional factors that have contributed to this robust environment are
sustained in investment and high savings rates. As far as the percentage
of gross capital formation in GDP is concerned, there has been a
significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal
year 2006. Further, the gross rate of savings as a proportion to GDP
registered solid growth from 23.5% to 34.8% for the same period.

The poising factors affect the Indian economy


Industrial Impact on Indian

growth economy




Consistent increase in the inflation rate:

The market remain under pressure after inflation recorded fastest rise in
more than 16 years in early August 2008, increasing the likelihood of the
Reserve Bank of India (RBI) raising interest rates again. With no major
key events scheduled in the forthcoming week, the market will closely
watch global stock market cues. But it may turn volatile on account of
expiry of August 2008 derivatives contracts on Thursday, 28 August
The wholesale price index rose 12.63% in 12 months to 9 August 2008,
above the previous week's annual rise of 12.44%, government data
released on Thursday, 21 August 2008, showed. Inflation for the week
ended 14 June 2008 was revised upwards to 11.80% from 11.42%.
Rising inflation rate has dashed hopes of any relaxation in the
monetary policy. Market expects Reserve Bank of India (RBI) to raise
the rates further in its next monetary policy review two months from
On 29 July 2008, the Reserve Bank of India (RBI), at its quarterly
policy review, raised repo rate by 50 basis points to a seven-year high of
9% to curb inflation and dampen inflationary expectations. RBI also
raised the cash reserve ratio (CRR), the proportion of funds that banks
must keep on deposit with it, by 25 basis points to 9%.
Market will closely watch developments on the Indo-US nuclear deal. A
two-day meeting of the 45 countries of the Nuclear Suppliers Group
(NSG) began in Vienna on Thursday, 21 August 2008. A green signal by
the NSG is required for the deal to proceed to the US Congress for final
ratification. As per reports, nuclear supplier nations at a meeting on
Thursday, 21 August 2008, proposed conditions for lifting a global ban
on fuel and technology exports to India, a step required to implement a
US-India nuclear cooperation deal.
A further rise in crude oil prices may act as a dampener for the stock
markets. Light, sweet crude for September 2008 delivery surged $5.62 to
$121.18 a barrel on Thursday, 21 August 2008 on the New York
Mercantile Exchange (NYMEX) on weaker dollar and worries about
tightening output from OPEC countries.
Foreign institutional investors (FIIs) sold shares worth Rs 831.40 crore
in August 2008 (till August 2008). FIIs sold shares worth Rs 28,133.40
crore in the calendar year 2008. Mutual funds sold shares worth Rs 886
crore in August 2008.In recent days the FII sold there share which are
now is of 900 crore. And the total amount of share sold of Mutul fund is
aorox.upto 950 crore.thus our sensex is continually facing the up and
down jerks which are still continues

Industrial production:
Falling crude oil prices and improvement in south west monsoon will
provide some relief to investors. Rising inflation remains a major worry
for the markets in the medium term.
The government will release June 2008 industrial production data at
12:00 IST on 12 August 2008. Reserve Bank of India’s recipe to contain
inflation by increasing the lending rates is expected to hurt industry,
manufacturing sector and the overall growth momentum. Industrial
production grew at the slowest pace in more than six years in May 2008,
at 3.8%, as against 10.6% in the same month of 2007, with
manufacturing showing signs of acute deceleration.
Inflation remains a major concern for the central bank. Inflation based
on the wholesale price index rose 12.01% in 12 months to 26 July 2008,
slightly above the previous week's annual rise of 11.98%, government
data released on 7 August 2008 showed.
Reserve Bank of India (RBI) on 29 July 2008, raised repo rate by 50
basis points to a seven-year high of 9% to curb inflation and dampen
inflationary expectations. RBI also raised the cash reserve ratio (CRR),
the proportion of funds that banks must keep on deposit with it, by 25
basis points to 9%. The central bank left its reverse repo and bank rates
unchanged. Responding to the RBI's monetary tightening, top lenders
HDFC and ICICI Bank and a number of state run bank have raised
interest rates.
The aggregate results of 2,988 companies showed 5.1% rise in net profit
to Rs 63,752 crore on 37% rise in sales to Rs 7,64,023 crore in Q1 June
2008 over Q1 June 2007. The net profit growth is now in single digits
the lowest in the past 20 quarters. In the June 2008 quarter, a number of
companies were hit by mark-to-market (MTM) losses on their foreign
exchange (forex) exposure.
Crude oil prices have declined sharply from record high $147.27 a barrel
hit on 11 July 2008. Oil held near $118 a barrel on Friday 8 August
2008. India imports 70% of its crude requirement. The rising crude oil
price affects the fiscal deficit position of the country and its sovereign

Market men will keenly watch the development of India’s nuclear deal
with US. The Board of Governor of the International Atomic Energy
Agency (IAEA) on 1 August 2008 unanimously adopted the India-
specific safeguards agreement, a key step in operationalization of the
Indo-US nuclear deal.

Foreign institutional investors (FII)’s bought shares worth Rs 1,527.90

in the first few days of August 2008 (till August 2008). FIIs sold shares
worth Rs 25,774.20 in the calendar year 2008, till 7 August 2008.
Mutual funds sold shares worth Rs286.10 in the month of August 2008 .

Balance of Payments
Balance of Payments anything that we buy or sell to the rest
of the world must be paid for. The current account (CA) tracks the flow
of goods and services between the US and the rest of the world and Net
Exports of Goods and Services, Net Income (from investments and
wages) and Net transfers The capital & financial account tracks the
payments for those goods & services (KFA) and records the purchase
and sale of financial and non-financial assets. It includes Official
international transactions which central banks collect as reserves.

Investor’s reaction
Most investments conversations in India obsessed about precisely
picking the bottom while this may be worthwhile past time for a few
professional investors for most others it exposes the exact opposite
which is to say they remain under invested when things began to work
again. India never did shine as brightly as people thought in 2006 nor is
as dull as the people are thinking now the truth is in the middle and there
is money to be had for the long term investors in recognizing that...

Impact on the nuclear deal.

US administration and the congressed bogged down over the
financial crisis in the country. The focus has shifted to bail out the
country from the economy turmoil and administration is trying hard to
iron out the parameters and specifics of the nearly 1 trillion dollar
package that is being put through stabilize frighten markets one of the
legislative strategies being discussed recently is that of attaching the
financial package to continue in resolution that is needed to fund the
government the end of the month. Some are hoping that the civilian
nuclear deal will also be attached to this resolution so that the congress
can pass one omnibus major prior to its adjournment for the season.

Indian BPO Companies

India’s outsourcing story has become the un Intended
victim of the collapse of some of the most venerable wall street firms
such as Lehman brothers & Meryl lynch since the subprime crisis began
to unrevealed idea can no longer claim that the BPO or KPO operation
will escape unscathed from troubles of the Us financial sector already
hundreds of jobs have been lost following the downsizing of the
operation and closing down of back offices in India the tall of the
collapse of Lehman is reportedly about the 2200 jobs several other
global financial services companies to have been force to cut the
strength of back office operations in India. Laying of people across
various functions as their incomes were hurt by crash of stock market
software majors such as TCS Infosys, Wipro & satyam that earn a
significant portion of their revenues from the banking. Financial services
and insurance sector would need to be prepared for loss of business
needless to say the loss of several well paying jobs would dampened
demand in some product segment as well as the real estate which is
already suffering door to the sluggish sales. Indian companies which
have partnered this institution for business collaboration or funds would
have to be prepared for a change in the partners an even the stake sale by
distressed institution.
However that is not to say the collapse of the financial sector would
make the outlook for India and its market more gloomy their have been a
few positive developments over the past couple of weeks for instance the
industrial production for July 2008 looks healthier rising 7.1% over the
same month last year. In particular the robust growth of the capital
goods sector [albeit over a low basin July 2007] and consumer durable
[perhaps in anticipation of the festival season of demand] are definitely
encouraging the decline in the global commodity prices particularly
crude oil now inching close q$90 a barrel should spell good news for
inflation control beside the first quarter GDP growth at 7.9% although
slows in 3 years. Reflects that the fundamental of the economy still
varies from that should inspire confidence in the performance of our
stock market.

Banks wants to be safe:

Even Indian banks have started tightening the news the
noose on the credit most banks have started going slow on proposals and
are looking not only at the best possible returns but also at the safety
factors because of the subprime collapse financial cost of these for these
banks have also gone up drastically in past few month most Indian banks
not tapped the international debt market. Financing cost for the more
corporate has gone up to 5 times in the past one year. Financing coming
under pressure fees on loans has at least doubled in the past one year.
Most Indians and foreign banks feel that the prices could last till next
year and they now want to play safe.

Stock market:
One often wonders why the Indian stock markets react more than
the US markets and an American financial institution goes burst. Close
look at the extreme volatility off course markets will lead to one to
conclude that the Indian markets provide neither adequate liquidity nor
value share efficiently. The result is that the very purpose for which
exchanges are constituted and shares are listed is defeated low floating
stock and low public share holding result in extreme volatility forcing
retail investors to shy away from the market.

Gross domestic product:

Earlier projection of 8% no they are predicting it as 7.4%. the
multilateral lending agencies has revised country’s growth projection
dur to current global financial turmoil and weekend investment outlook
the bank revised its growth projection for the developing Asian
economies as a whole to 7.5% this year & 7.2% next year from earlier
projections of 7.6% & 7.8% respectively. These economies posted the
fastest growth of 9% in nearly two decade in 2007
Rupee v/s dollar:
The issue concerning the rupee exchange rate to the
case of either near zero volatility or sudden excessive volatility it is
unfortunate that we have never witnessed orderly moves on the
exchange rate base on pure economic macro or micro fundamentals this
makes the task of managing the exchange rate risk very difficult for the
market participants who run a multicurrency balance sheet having either
import or export or foreign currency lending or borrowing ideally,
rupee(against dollar) should depreciate by inflation adjusted interest rate
differential added to that is the trade gap (on the current account) and net
flows through the capital; account (debt & equity) while the inflation
adjusted interest differential and the negative trade gap would guide
rupee depreciation the flows in the capital account will cushion the rupee
depreciation hence flows in the capital account
(Through FII/FDI/PE/VC/ECB/FCCB/DR etc) are very critical to guide
rupee exchange rate.)
the three core issues to be addressed to guide orderly exchange moves
are to move in to current account surplus by boosting exports and other
receivable to build long term capital account flows to minimize the risk
from volatile short term flows and to hedge risk on crude oil prices at
appropriate levels to address the said issues rupee exchange rates should
remain attractive through exporters should not give exchange rate
benefits to short term foreign investors and to reduce volatility in the oil
import bill, gradual rupee depreciation by 2-4% per annum will be in
order and to undo the recent damage rupee reversal (the midpoint of 39
& 47) 43.00 should help the Indian economy.
I would look gor the rupee to settle in the range of 43-43.80 by March
2009 with the support of the RBI. Till they said core issues are
addressed yes as rupee appreciates too much to 39. Now it has
depreciated too much at to 47. mainly ion volatility in trade gap and
capital account flows it is time for market participants to move away
from windfall gains and to focus on students risk management practices
to arrest the downside


The overall analysis of the intervention to the Indian economy
by the global financial crisis depicts that this crisis is the end of the
beginning still it has long way to go but one good news for the Indian
economy is the Indians banks are stable to capitalize the market but
together contribution of the factors to the GDP requires some stringent
actions from the concerned authorities