The Crisis in India:
After a long spell of growth, the Indian economy is experiencing a downturn. Industrial growth is faltering. The FEX reserves are depleting, the rupee is depreciating and the sensex is shuttling near 10000 marks. The Indian economy, in line with global scenario, commenced groping in the dark.
The immediate effect of the US crisis has been heavy outflow of FIIs from the equity market. Faced with the need to retrench assets to cover the losses in their home countries and seeking havens of safety in a highly volatile environment, FIIs have been major sellers in Indian Markets. A pull out of the FIIs has triggered collapse in Indian Stock Market. The sensex have fallen from its closing peak of 20873 on Jan, 2008 to around 9500 by the beginning of November 2008. Driven the stock indices down, the exit of FIIs has led to a sharp depreciation of the rupees. Going by RBI reference rate, between January 2008 and November 2008, the rupee depreciated by almost 25% with respect to a weak currency like dollar (from Rs.39.20 to Rs.50.20). The depreciation occurred despite having frequent sale of dollars by the RBI.
The second route through the global financial crisis had affected India is through the exposure of Indian Banks situated abroad or banks operating in India to the impaired assets resulting from the sub prime crisis. Unfortunately, there are no clear estimates of the extent of that exposure, giving room for rumour in determining market trends. ICICI Bank was one of the major victims of run on the bank for quite a short period due to rumours that sub prime exposures had badly damaged its Balance Sheet even though RBI claimed that the exposure of Indian Banks to assets impaired by the financial crisis is quite small.
The RBI had estimated that as a result of exposure to Collaterised Debt Obligations (CDO) and Credit Default Swap (CDS), the market losses of Indian Banks at the end of July 2008 was around USD 450 mio including USD 90 mio to Public Sector Banks and USD 360 mio to Private Sector Banks. Though it is a serious concern, RBI opined that even if they are to be provided for, these Banks are well capitalized and can handle the situation. The fears are compounded by the minority in metros and major cities dealing with foreign banks and whose global exposures to toxic assets are substantial. What is disgusting to the investor and depositors are the limited Information available on the risks to which they are exposed.
The fourth indirect fall out of the global crisis and its ripples in India is the losses sustained by NBFCs/Mutual Funds as a result of their exposure to domestic stock market and currency market. The losses would be larger than expected and is resulted in RBI’ s decision to direct Banks to extend loans to MFs against CDs or buy back of their own CDs before maturity- under Liquidity Adjustment Facility (LAF). These losses are bound to render some institution fragile, with implications that will become evident only in the ensuing months,
In the uncertain environment, Banks/FIs are more concerned about their own Balance Sheet and have been cutting back on credit especially the huge volume of housing, automobile and retail loans provided to individuals. The reluctances of lenders to increase their exposures in the market in which they are already overexposed and the fears of increasing payment obligations in an uncertain economic environment are bound to curtail debt financed consumption and infrastructure investments. It is known that credit financed housing investments and credit financed consumption have been important drivers of growth in recent years and underpin the 9% growth trajectory that India have been experiencing.
Finally, the global recession generated by the financial crisis in the developed economies would adversely affect India’s exports especially exports of IT and ITES. More than 60% of IT/ITES are directed to the US international Banks/FIs. The nationalization of many of these Banks/FIs would increase the pressure to cut outsourcing to keep jobs in the developed countries. The reported reduction of capacity utilization, labour retrenchment, contraction of salary structure etc. by major industrial houses engaged in automobiles, textiles, iron and steel, cement, aviation etc. have created much hue and cry among the public. Pursuant to the slowing of growth outside the financial sector would have implications for merchandise and service exports. The net result would be a smaller export stimulus and widening trade deficit.
RBI Measures:
In the developed economies like US and European countries, the Balance Sheet of many Banks/FIs was rotten due to credit defaults and many financial institutions became bankrupt. Even though, the Banks/FIs in India are not that much affected, the withdrawal of FIIs from our stock market generated a threat of instability in our economy. In such a circumstance, the stabilization measures of RBI‘s have aided to avert liquidity squeeze substantially. The major steps initiated by RBI are as follows:
a.
Cash Reserve Ratio (CRR)
August 30, 2008
9%
October 11, 2008
7.50% (Reduced by 150 bps)
October 15, 2008
6.50% (Reduced by 100 bps)
November 1, 2008
5.50% (Reduced by 100 bps)
b.
Repo Rate
July 30, 2008
9%
October 20, 2008
8% (Reduced by 100 bps)
November 1, 2008
7.50% (Reduced by 50 bps)
c.
Statutory Liquidity Ratio (SLR)
November 1, 2005
24% (Reduced by 100 bps)
d.
Introduction of dual repo on September 15, 2008 to increase liquidity
e.
Provision of liquidity support of Rs.60,000 crores to MFs and NBFC ‘ s through commercial banks
f.
Special Refinance facility to Commercial Banks.
g.
Dollar support to Indian Banks with foreign branches
The RBI reiterates that it is confident of managing the situation and minimizing the adverse impact of global crisis to Indian economy. Pursuant to better economic recovery, P. Chidambaram, our Finance Minister, optimistically pointed out
“there is a storm blowing across the world. India will be affected to some extent, although indirectly, but Indian Business and industry have placed India in a situation where we can weather the storm.”
Conclusion:
If we look at the economic scenario prevailing in and around the country, the postulates of globalisation and the aftermath of global villages concept have became more significant. The positive correlated change in national economy in line with global happenings/events is quite visible and challenging. The FIIs/ FDIs have more voice and role in FEX growth. The ups and downs of indices at NASDAQ / NIKKE/ London Stock Exchange will get mechanically reflected in Chinese /Indian Stock Exchanges within seconds. The situation demands improvement in investor confidence. To achieve this objective, the Global economy needs more funds to improve liquidity and wants proper and pragmatic economic restructuring. Our Government is also not in the backstage. Frequent reduction of CRR and repo rates, accompanied by slashing of SLR are clear indication of measures puts forth by RBI to keep up the pace of economic growth and to retain the investor confidence, both domestic and international. The strategies for restructuring, through quite time consuming, demands integration of diverse segments of economy, including financial, manufacturing and service segments, under close supervision and regulation. The repeated measures enforced by RBI coupled with rapport from GOI will definitely rejuvenate Indian economic scenario at the optimal level.
No comments:
Post a Comment