What is the Impact of financial crises on India?
Rating: +2
The US financial system is the main engine that drives the entire global economy. Obviously, if the prime engine gets breakdown, it will show a negative impact on others. Despite many measure taken by the RBI and government of India, the fact remains that India, like the rest of the Asia, is very much linked to the health of the American financial system. Capital flows in the Indian stock market under FII depend on the easy liquidity in the American financial system. The recent catastrophic global shockwaves form the US blocked the liquidity so that world stock markets witnessed a massive disaster of stock markets in the Asia and Europe.
Impact on India:
The reserve bank of India has been pumping in liquidity into the system and local banks have been borrowing at lease Rs 70,000 crores on an average under the liquidity adjustment facility (LAF). India’s GDP growth rate estimate for the current fiscal (2008-2009) bas been downgraded from 8 % to 7.4%.wtih the financial turmoil in the US and Europe showing signs of worsening since the publication of ADB’s half – yearly report that the GDP growth in India turns out to be even lower than that projected by ADB – just around 7%.
Slow down of Verticals
It is hard to find a vertical that’s untouched by the crisis Mr. Peter Allen – MD of TPT Said that “Verticals such as insurance, retail, travel land transportation, hospitality, healthcare and life sciences are all impacted by crisis in some or other way”. Many Indian industries, especially in the service sector, depend on US Markets badly hit.
Panic on bourses:
In India, there is a serious concern about the likely impact on the economy of heavy foreign exchange outflows in the wake of sustained selling by FIIs on the bourses and withdrawal of funds by others. Equity values are very low level and many established companies are unable to complete their right issues even after fixing offer prices below related market quotations.
Adverse impact on IT sector:
The US financial crisis is having an adverse impact on the India IT sector as customers reduce or delay their spending on deploying new technology applications. Due to sudden collapse of major investment banks Lehman Brothers, Merrill Lynch and AIG, Indian IT industry has lost contract renewals. While US companies upgrade addition to new system, IT companies in India would face the heat.
Indian Outsourcing Industry vulnerable:
Since the Indian BPO industry depends largely on BFSI sector (banking, financial services and insurance) the US slowdown impact can be high. It would mean contract terminations, fewer renewals, cutting jobs and pricing pressures. Since nearly two-thirds of revenues of Indian BPOs come from the US, (giant companies like AIG, Citibank and Lehman Brothers) the impact on small and medium sized players would be high. Now outsourcing industry is in a great panic and losing business substantially because their clients are in serious financial troubles.
Decline in capital flows:
There is another downturn is decline in capital flows into the stock markets as a result of sudden fall of share prices has led to a change in exchange rate and fall in the rupee vs US dollar. It is painful to insulate India from the effects of the American problems.”The complexity of the financial products and innovations introduced in the US financial system are the main reasons for financial turmoil”. This innovation has led to a historic financial disaster. The American bitter experiences should be a future guide to the rest of the world to avoid pitfalls.
Impact on the Indian stock market:
FIIs, which are the key source of liquidity in Indian stock markets. A leading domestic bank in India invested in Lehman Brothers faced tough times. Bank depositors were in panic until reports clarified the finical and liquid position of the bank. The baking Index too was in the red until the Finance Minister gave the assurance that the public sector commercial banks had little impact of Lehman’s bankruptcy. Institutional investors, who had invested in securitized paper from the sub prime home loan market, saw their investments turning into losses. Most big investors have a certain fixed proportion of their total investments invested in various parts of the world. Once investments in the US have been declared as bad, these big institutional investors, to make good of their losses on the sub prime market, have been selling their investments in India and other emerging markets. Since the amount of selling in the market is very less than the amount of buying, Indian stock prices have been falling.
Impact on commodity prices:
Fears of global economic slowdown are showing an identifiable impact on commodity prices. Apprehensions of slowing world growth have combined with appreciation with of the dollar (against euro) to drag commodity prices lower. In 2008, the prices of many commodities, specifically oil and food, rose so high as to cause genuine economic disturbance, threatening stagflation and a reversal of globalization.
Role of India in handling financial crisis:
Dr.Singh said that the existing global financial architecture was not robust enough to deal with the international turbulence in financial markets. Addressing the UNGA (UN General Assembly) session, Dr.Singh said there is a need for a new international initiative to being structural reform in the world’s financial system with more effective regulation and stronger system of multilateral consultations and surveillance. The explosion of financial innovation unaccompanied by credible systemic regulation has made the financial system vulnerable.
Indian banking system insulated from financial turbulence:
The finance minister, Mr.P.Chidambaram said the Indian banking system must reasonably insulate from the financial market woes unfolding in the US. He hinted at the possibility of a ‘credit squeeze’ in the domestic economy as fallout of the global finical precipitated by the recent collapse of Lehman Brothers and buyout of Merrill Lynch by bank of America. Our banks have strong balance sheet and they are very well regulated, he added.
Lessons for the future:
The ongoing upheavals in the banking and financial sectors worldwide largely exposed the inadequacies in the system due to absence of healthy risk assessment and management system and strong capital base to absorb the shocks of these crises. The present global financial carnage has become one of the most radical reshaping of the global banking sector, as governments and the private sector battle to shore up the financial system.As all economies connected with the US economy, when it sinks, it will take the rest of the world along with it. However, if the right lessons are learnt from this disaster, the US meltdown would at least have served a purpose. Baking and other financial institutions would have to go back to basics. To safe guard the people’s money, professional integrity and morality in transaction have to be resorted. The financial sector is the life-stream that supports and nourishes the real economy.
Recommendations:
• It is important for a public regulator to sand by and vigil to safe guard the interest of the customers (depositors) and to prevent excessive risk taking, malpractices.
• Basel committee recommendations must be straightly imposed management norms for credit risk and market risk.
• Regulations must lay greater emphasis on liquidity risk management and there is need for uniform norms in the era of international banking. Investment banks must be regulated at par with commercial banks.
• Stick capital adequacy regulations will keep a check on excessive lending.
• Investment banks desperately need some amount of liability insurance to prevent ‘bank runs. They require a formal lender of last resort door from the central banks and that door must remain open to extend helping hand in case of meltdown.
