Transcript GENESIS OF GLOBAL FINANCIAL CRISIS

A Joint Venture of Bank Of India & The Bombay Stock Exchange Ltd.
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.
GENESIS OF GLOBAL
FINANCIAL CRISIS
 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.
 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%
Table 2: Global Economic Outlook for 2009 (per cent)
Month of Forecast
Indicator
Apr-08
Jul-08
Oct-08
Nov-08
2008 2009 2008 2009 2008 2009 2008 2009
1. Global
Growth
3.7 3.8 4.1 3.9 3.9
3 3.4 0.5
(a)
Advanced
Economie
s
1.3 1.3 1.7 1.4 1.5 0.5
1 -2
(b) EMEs 6.7 6.6 6.9 6.7 6.9 6.1 6.3 3.3
2. World
Trade
Volume
3.7 3.8 4.1 3.9 3.9
3 4.1 -2.8
Jan-09
Apr-0
2008 2009 2008 200
3.4 0.5 3.2 -1.
1 -2 0.9 -3.
6.3 3.3 6.1 1.
4.1 -2.8 3.3 -1
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; primeborrower encouraged to default.
 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.
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.
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.
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.
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
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.
Impact on Capital Market
Index Movement in last one year
Impact on Exchange Rates
Impact on yield on 10 years Government Bond
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.
 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.
STRENGTH OF INDIAN
FINANCIAL SECTOR
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.
 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.
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.
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.
 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.
STABILITY BEYOND EXPECTATIONS.
INDIA GENERAL ELECTION
MAY 2009.
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
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
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.
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
POST – POLL MARKET
SENTIMENTS
 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.
 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.
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.
 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.
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.
Sensex For The Month May 2009
16000.00
18/05/09
(14296)
14000.00
15/05/09
12000.00
Sensex
10000.00
8000.00
6000.00
4000.00
2000.00
0.00
(12173)
Market Wide circuit Breaker in the
Indian Stock Market
 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.
Table V – Incidence of Market Wide Circuit Breaker In Indian Stock Market
Trade Date Opening
High
Low
17-May-04
5020.89
5020.89
22-May-06
11071.63
11142.9
17-Oct-07
18037.9
18841.29
Close
4227.5
Previous
Close
Points
(Increase
% Change
4505.16
5069.87
-842.37
-16.62
9826.91 10481.77
10938.61
-1111.7
-10.16
17307.9
18715.82
19051.86
-1743.96
-9.15
22-Jan-08
16884.09 17068.57 15332.42 16729.94
17605.35
-2272.93
-12.91
18-May-09
13479.39
12173.42
2110.79
17.34
14284.21 13479.39
14284.21
Trade
Market Wide Circuit
Date
Breaker
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.
22-May-06 10% MWCB applied at
11:56, trading halted for 1
hour.
Reason
BJP government
lost power
Confusion
regarding tax
circular.
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 General Election
index) on a day for 2 hours
Result in favour
(15%), subsequent to election
of UPA
result in favour of Congress
government.market re-opened at
11:55 and MWCB applied for
20%, market halted for rest of the
day
THANK YOU