global finanacial crisis - impact on indian stock market

8/3/2019 Global Finanacial Crisis - Impact on Indian Stock Market

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Global Economical Crisis-Impact on Indian Stock Markets

1.1 INTRODUCTION

Global Financial Crisis of 2008

The global financial crisis of 2008 is a major ongoing financial crisis, the worst of its

kind since the Great Depression.

It became prominently visible in September 2008 with the failure, merger or conservator

ship of several large United States-based financial firms. The underlying causes leading

to the crisis had been reported in business journals for many months before September,

with commentary about the financial stability of leading US and European investment

banks, insurance firms and mortgage banks consequent to the sub-prime mortgage crisis.

Beginning with failures of large financial institutions in the United States, it rapidly

evolved into a global crisis resulting in a number of European banks' failures and declines

in various stock indexes, and significant reductions in the market-value of equities (stock)

and commodities worldwide. The crisis has led to a liquidity problem and the de-

leveraging of financial institutions especially in the United States and Europe, which

further accelerated the liquidity crisis. World political leaders and national ministers of

finance and central bank directors have coordinated their efforts to reduce fears, but the

crisis is ongoing and continues to change, evolving at the close of October 2008 into a

currency crisis with investors transferring vast capital resources into stronger currencies

such as the Yen, the Dollar and the Swiss Franc, leading many emergent economies to

seek aid from the International Monetary Fund. The crisis has roots in the sub-prime

mortgage crisis and is an acute phase of the financial crisis of 2007-2008.

Net Worth Stock Broking Limited7


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Sub-Prime Mortgage Crisis

Sub-prime, as the word suggests, is anything that is not prime. In the sub-prime crisis

context, it simply means lending money to sub-prime borrowers, i.e., lending to people

with low or poor credit worthiness. Much thought and energy has already been spent in

the literature in understanding the causes of the sub-prime crisis.

To put it very simply, the sub-prime crisis was caused because the lending norms in the

USA were very lax. It is joked about in the academic circles that any man who was not

on a respirator was given a loan without any regard to his or her credit-worthiness. This

was brought about by the "spend yourself out of the post dotcom bust recession" policy

of the American government at that time.

The question is whether the American crisis has seen its worst, or will it deepen? The US

Federal Reserve Board has cut the interest rates by a steep 0.75 percent on January 22,

2009. There is an expectation that the US economy will stabilize as a result. Will such

measures succeed? It is unlikely. They still do not remove the basic weakness of the

American economy.

The first weakness is in the service sector. Previously the US was leading in software

production and new designs, etc. This supremacy is now being challenged by Indian

companies like TCS, Infosys and Wipro. Many leading companies are transferring their

research departments to India because wages are low here. Similar trends can be seen in

many areas like clinical trials, translation, architectural designing, tele-marketing, and

publishing and printing. This weakness can only marginally be managed from

devaluation of the dollar. It is rooted more in the moribund nature of the US education

system.

The second source of weakness is in the auto-loans and credit cards. Another crisis, like

that in the sub-prime housing sector, is in the making. The present troubles started here.

The US Federal Reserve Board encouraged people to take loans to buy houses. The

consequent demand from the housing sector kept the US economy chugging for about

three years. But the borrowers could not repay their housing loans because of decline in



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salaries and wages due to international competition. The loans went into default. Banks

seized the houses, but had to sell them at much lower prices, and had to book huge losses.

A similar crisis is in the making in the auto-loans sector. Car majors are extending loans

to borrowers. The loans backed by security of an automobile are considered 'safe', much

like the sub-prime housing was considered safe. The borrowers are likely to default on

these auto-loans and also credit cards just as they did on housing loans.

The third source of weakness is high oil prices. Americans love big and fast cars. They

have to import huge quantities of oil to keep them running. This is a big drain on the

American economy especially in view of the rising oil prices. The American economy is

more energy intensive than, say, India. They consume more oil per dollar of income

generated. Consequently, high oil prices have a greater negative impact on that economy.The adverse impact on India is reduced for another reason. The oil-rich Arab countries

are making grand projects like hotels on artificial islands. The manpower for these

projects is supplied in large measure by India. These workers send remittances back

home. Thus, part of the money spent by the world in buying Arab oil flows to India. The

negative impact of high oil prices is partly cancelled by remittances for India but not for

America.

The fourth source of weakness is the expenditure that country has taken upon itself by

acting as the global policeman. The US is incurring huge expenditures in wars in Iraq and

Afghanistan. There seems to be no end to these in sight.

Global Responses

On September 15, 2008, China cut its interest rate for the first time since 2002. Indonesia

reduced its overnight repo rate, by two percentage points to 10.25 percent. The Reserve

Bank of Australia injected nearly $ 1.5 Billion into the banking system, nearly three times

as much as the market's estimated requirement. The Reserve Bank of India added almost

$ 1.32 Billion, through a re-finance operation, its biggest in at least a month.

In Taiwan, the Central Bank on September 16, 2008, said it would cut its required reserve

ratios for the first time in eight years. The Central Bank added $ 3.59 Billion into the



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foreign-currency interbank market the same day. Bank of Japan pumped $ 29.3 Billion

into the financial system on September 17, 2008, and the Reserve Bank of Australia

added $ 3.45 Billion the same day. The European Central Bank injected $ 99.8 Billion in

a one-day money-market auction. The Bank of England pumped in $ 36 Billion.

Altogether, central banks throughout the world added more than $ 200 Billion from the

beginning of the week to September 17, 2008.

US Responses

The Federal Reserve, Treasury, and Securities and Exchange Commission took several

steps on September 19 to intervene in the crisis. To stop the potential run on money

market mutual funds, the Treasury also announced on September 19 a new $ 50 Billion

program to insure the investments, similar to the Federal Deposit Insurance Corporation

(FDIC) program. Part of the announcements included temporary exceptions to Section

23A and 23B (Regulation W), allowing financial groups to more easily share funds

within their group. The exceptions would expire on January 30, 2009, unless extended by

the Federal Reserve Board. The Securities and Exchange Commission announced

termination of short-selling of 799 financial stocks, as well as action against naked short

selling, as part of its reaction to the mortgage crisis.

American Crisis and India

The basic reason for the decline is crisis in the US economy. Indian and American

economies are interlinked in two ways - through trade in goods and flow of capital.

The demand for Indian exports declines as the American economy sinks. But India

certainly gains from cheaper imports in the same measure. Garment exporter suffers

because his orders are cancelled but software engineer makes merry because he gets

Windows software cheap. The combined effect of exports and imports on the economy is

nearly zero. However, share markets respond to the woes of exporters who are listed on

the bourses and not to the gains of consumers. Thus, there is a negative impact on Indian

share markets although there is little impact on the economy.



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The interlinkage through capital flows is tricky. There is an outflow of capital from India

in the short run as the American economy sinks, but there is greater inflow towards India

in the long term.

Global Banks incur losses as troubles of the American economy deepen. Loans given by

them to American home-owners are not repaid. They have to resort to sale of shares in

the Indian markets to raise money to meet these losses in the US. The decline in Indian

share markets in the last two weeks started with such a sell off by foreign banks.

The Government of India is concerned that global black money is being invested in

Indian share markets. The recent clamp-down on Promissory Notes was made to prevent

such inflows. The

Impact of the Crisis on India

While the overall policy approach has been able to mitigate the potential impact of the

turmoil on domestic financial markets and the economy, with the increasing integration

of the Indian economy and its financial markets with rest of the world, there is

recognition that the country does face some downside risks from these international

developments. The risks arise mainly from the potential reversal of capital flows on a

sustained medium-term basis from the projected slow-down of the global economy,

particularly in advanced economies, and from some elements of potential financial

contagion. In India, the adverse effects have so far been mainly in the equity markets

because of reversal of portfolio equity flows, and the concomitant effects on the domestic

forex market and liquidity conditions. The macro effects have so far been muted due to

the overall strength of domestic demand, the healthy balance sheets of the Indian

corporate sector, and the predominant domestic financing of investment.

As might be expected, the main impact of the global financial turmoil in India has

emanated from the significant change experienced in the capital account in 2008-09 so

far, relative to the previous year (Table 1). Total net capital flows fell from US $ 17.3

Billion in April-June 2007 to US $ 13.2 Billion in April-June 2008. Nonetheless, capital



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flows are expected to be more than sufficient to cover the current account deficit this year

as well.

While Foreign Direct Investment (FDI) inflows have continued to exhibit accelerated

growth (US $ 16.7 Billion during April-August 2008 as compared with US $ 8.5 Billion

in the corresponding period of 2007), portfolio investments by Foreign Institutional

Investors (FIIs) witnessed a net outflow of about US $ 6.4 Billion in April-September

2008 as compared with a net inflow of US $ 15.5 Billion in the corresponding period last

year.

Similarly, external commercial borrowings of the corporate sector declined from US $

7.0 Billion in April-June 2007 to US $ 1.6 Billion in April-June 2008, partially in

response to policy measures in the face of excess flows in 2007-08, but also due to the

current turmoil in advanced economies.

With the existence of a merchandise trade deficit of 7.7 per cent of GDP in 2007-08, and

a current account deficit of 1.5 per cent, and change in perceptions with respect to capital

flows, there has been significant pressure on the Indian exchange rate in recent months.

Whereas the real exchange rate appreciated from an index of 104.9 (Base 1993-94=100)

(US $ 1 = Rs. 46.12) in September 2006 to 115.0 (US $ 1 = Rs. 40.34) in September

2007, it has now depreciated to a level of 101.5 (US $ 1 = Rs. 48.74) as on October 8,

2008.

decline of the dollar has forced global investors to look for another place to invest their

capital. The Saudi Royal Family, for example, is earning huge amounts from the sale of

oil due to high prices that are prevailing. Till recently, they were investing this income in

New York. But this will now flow to Mumbai, and Indian share markets will glow.

Remember the Indian share markets have been scaling new heights as the US economy

has been sinking in the last two years. Surely, Indian share markets jitter every time bad

news comes from America.



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Trends in Capital Flows

US $ Million

Component Period 2007-08 2008-09

Foreign Direct Investment to India April - August 8,536 16,733

FIIs (Net) * April - September 26 15,508 -6,421

External Commercial Borrowings (Net) April - June 6,990 1,559

Short-Term Trade Credits (Net) April - June 1,804 2,173

Memo

ECB Approvals April - August 13,375 8,127

Foreign Exchange Reserves (Variation) April - September 26 48,583 -17,904

Foreign Exchange Reserves (End-Period) September 26, 2008 247,762 291,819

* Data on FIIS presented in this table represent inflows into the country and, thus, may

differ from data relating to net investment in stock exchanges by FIIs.



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1.2 RESEARCH METHODOLOGY

Sample Size :

Three sectors

Three in each Sector

Sampling Technique:

Simple Random Sampling

Analysis:

Technical analysis: Through the Tables and Graphs

Data:

Secondary data from 01-01-2009 to 01-02-2009

Interpretation:

Percentage of change of each company and represents the Average of change

to the whole sector movement of sector.

Sectorial movement shows whether the sector is positive or negative .And the

sector show impact on Indian Stock Market.



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1.3 Limitations

Sample Size is three sectors hich may not be able to show that exact picture

of the market.

We took three companys in each which may not be able show that exact

picture of the sector

Time period of sector is for thirty days which is to find out the market

movement

The fundamental news and company results may shows the impact on the

study during the study period.

Sub prime crisis in still showing its impact on the market on few sector

majority



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2.1 COMPANY PROFILE

A world of intelligent investing

Ever since its inception in 1993, Networth Stock Broking Limited (NSBL)

has sought to provide premium financial services and information, so that

the power of investment is vested with the client. We equip those who investwith us to make intelligent investment decisions, providing them with the

flexibility to either tap into our extensive knowledge and expertise, or make

their own decisions. NSBL made its debut into the financial world by

servicing Institutional clients, and proved its high scalability of operations

by growing exponentially over a short period of time. Now, powered by a

top-notch research team and a network of experts, we provide an array of

retail broking services across the globe - spanning India, Middle East,

Europe and America. Currently, we are a Depository participant at Central

Depository Services India (CDSL) and aim to become one at National

Securities Depository (NSDL) by the end of this quarter. Our strong support,

technology-driven operations and business units of research, distribution and

advisory coalesce to provide you with a one-stop solution to cater to all your

broking and investment needs. Our customers have been participating in the

booming commodities markets with our membership at the Multi

Commodity Exchange of India (MCX) and National Commodity &

Derivatives Exchange (NCDEX) through Networth Stock.Com Ltd.

http://www.networthstock.com/index.aspx


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NSBL is a member of the National Stock Exchange of India Ltd (NSE)

and the Bombay Stock Exchange Ltd (BSE) on the Capital Market and

Derivatives (Futures & Options) segment . It is also a listed company at

the BSE.

Corporate overview

Networth is a listed entity on the BSE since 1994

The company is professionally managed with experience of over a

decade in broking and advisory services

Networth is a member of BSE, NSE, MCX, NCDEX, AMFI, CDSL Current network in India with 256 branches and franchise. Presence

in major metros and cities

Empanelled with prominent domestic Mutual Funds, Insurance

Companies, Banks, Financial Institutions and Foreign Financial

Institutions.

Strong experienced professional team

50000+ strong and growing client base

Average daily broking turnover of around INR 5 billion

AUM with Investment Advisory Services of around INR 6 billion



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2.2INFRASTRUCTURE

A corporate office and 3 divisional offices in CBD of Mumbai which

houses state-of-the-art dealing room, research wing & management

and back offices.

All of 256 branches and franchisees are fully wired and connected to

hub at Corporate office at Mumbai. Add on branches also will be

wired and connected to central hub

Web enabled connectivity and software in place for net trading.

200 operative IDs for dealing room

State of the Art accounting and billing system, on line risk

management system in place with 100% redundancy back up.

In house technology back up team to ensure un-interrupted

connectivity.



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2.3 PRODUCTS AND SERVICES AND PROTFOLIO

Retail and institutional broking

Research for institutional and retail clients

Distribution of financial products

Corporate finance

Net trading

Depository services

Commodities Broking



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The Networth connectivity with 256 branches and growing

Net Worth Stock Broking Limited

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Networth Research Products

India Daily Notes Market Insight for the day

Market Musing Whats Hot and Whats not !!!

Bullion Tracker Analysis of trends in Gold & Silver

Economy Pulse Monthly overview of macro factors

Company-Specific Reports Detailed fundamental report

subsequent to plant visit & management meet

Pre-Quarter Result Previews Result preview of companies under

coverage

Result Update Post result review of companies under coverage

Stock Stance - Management Visit Note

Theme-Based Reports Budget Analysis, Dividend

NSBL - Objectives of the Company:

To increase its investors all over the country

To provide better services to their clients

To maintain good relation with the clients

Increasing the profits of the company

To lead their transactions under the control Act of Securities Exchange Board ofIndia 1992



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NSBL - Product / Service produced:

Here the product means service relate to the company the company Brokerage Services.Its has spreaded across over the country with experienced and expertized in the

Brokerage services rendered by the Brokers in their Branches to their Investors.

NSBL Market Research:

Market research is one of important Methodology for finding the problem and make

analyze and interpret and solve the problem. In every area it has sharing the contribution

towards successing the projects / problems.

In the NSBL company has also adopted this technique by Research analysts to these

brokers utilizes and understands their researches then they will moving in a right path.

The research analysts analyses the company performance and what are the companys

stocks are moving why the companys scrips prices are fluctuating and what are the

effects for this situations under the circumstances. Then the company successfullyoperating their activities produce of good operating Results.

NSBL Operating Results:

The Operating Results of the NSBL company is satisfactory compare to its competitors

are India Bulls, Networth Stock Broking ltd, India info line etc., They are giving quality

services to their clients and improving their retained gains. Through this they are

creating new clients through adopting different strategies for attracting the clientstowards its business then its future glorious.



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NSBL Future Outlook:

Its future will be Glorious because it has recently launches new service to

expand its business i.e., NSBL - INSURANCE it tie ups with other insurance companies

like Reliance insurance and Bajaj life insurance to gather the customers towards their

company to other insurance companies they will gain the profit like the company NSBL

planned for the future make its fruitful

.



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Indian scenario:

The seventh largest and second most popular country in the world, India has long been

considered a country of unrealized potential. A new spirit of economic freedom is now

stirring in the country, bringing sweeping changes in its wake. A series of ambitious

economic reforms aimed at deregulating the country and stimulating foreign investment

has moved India firmly into the front ranks of the rapidly growing Asia Pacific region

and unleashed the latent strengths of a complex and rapidly changing nation.

India's process of economic reform is firmly rooted in a political consensus that spans her

diverse political parties. India's democracy is a known and stable factor, which has taken

deep roots over nearly half a century. Importantly, India has no fundamental conflict

between its political and economic systems. Its political institutions have fostered an

open society with strong collective and individual rights and an environment supportive

of free economic enterprise.

India's time tested institutions offer foreign investors a transparent environment that

guarantees the security of their long term investments. These include a free and vibrant

press, a judiciary which can and does overrule the government, a sophisticated legal and

accounting system and a user friendly intellectual infrastructure. India's dynamic and

highly competitive private sector has long been the backbone of its economic activity. It

accounts for over 75% of its Gross Domestic Product and offers considerable scope for

joint ventures and collaborations. Today, India is one of the most exciting emerging

markets in the world. Skilled managerial and technical manpower that match the best

available in the world and a middle class whose size exceeds the population of the USA

or the European Union, provide India with a distinct cutting edge in global competition.

A firm faces several types of risks. Its profitability fluctuates due to unanticipated

changes in demand, cost, price, taxes, interest rates, exchange rates, etc. managers may

not be able to fully control these risks, but to some extent, can decide the risk that a firm

can bear. They adopt many strategies to reduce the risk by keeping several options open,



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which ultimately creates flexibility that might bail them out in difficulties. One major

way of reducing the exposure to risk is by entering into financial derivatives. Risk

management is an integral part of the financial service industry: and due to globalization

the Indian financial market will see an increase in the products in this category.

The changing scenario has forged a change in the Indian security market. Also certain

market imperfections operative in the market called for change. A majority of

organizations and individuals face financial risk due to changes in the stock market,

prices, interest rates and exchange rates having great significance on the financial

soundness.

Risk taking is the core competence of entrepreneurial spirit: without embracing risks a

business can not reap rewards. Risk and return are the two sides of a coin: while risk

taking is known for ages, the emergence of risk management as a specialized field is a

fairly recent phenomenon. Risk management is an integral part of the financial service

industry. Fund managers, merchant bankers, brokers and portfolio managers, are all

exposed to various types of risks. One of the most important risks is price risk.

In todays era investor invest their funds after basic analysis. The basic function of

financial market is to facilitate the transfer of funds from surplus sectors that is from

(lenders) to deficit sectors (borrowers). If we look at the financial cycle then we can say

that households make their savings, which is provided to industrial sectors, which earn

profit and finally this profit will go to the households in the form of interest and dividend.

Indian Financial System is made-up of 2 types of markets i.e. Capital Market & Money

market.

CAPITAL MARKET HISTORY

The history of the Indian capital markets and the stock market, in particular can be traced

back to 1861 when the American Civil War began. The opening of the Suez Canal during

the 1860s led to a tremendous increase in exports to the United Kingdom and United

States. Several companies were formed during this period and many banks came to the



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fore to handle the finances relating to these trades. With many of these registered under

the British Companies Act, the Stock Exchange, Mumbai, came into existence in 1875.

It was an unincorporated body of stockbrokers, which started doing business in the city

under a banyan tree. Business was essentially confined to company owners and brokers,

with very little interest evinced by the general public. There had been much fluctuation in

the stock market on account of the American war and the battles in Europe. Sir

Premchand Roychand remained a kingpin for many years.

Sir Phiroze Jeejeebhoy was another who dominated the stock market scene from 1946 to

1980. His word was law and he had a great deal of influence over both brokers and the

government. He was a good regulator and many crises were averted due to his wisdom

and practicality. The BSE building, icon of the Indian capital markets, is called P.J.

Tower in his memory. The planning process started in India in 1951, with importance

being given to the formation of institutions and markets The Securities Contract

Regulation Act 1956 became the parent regulation after the Indian Contract Act 1872, a

basic law to be followed by security markets in India. To regulate the issue of share

prices, the Controller of Capital Issues Act (CCI) was passed in 1947.

The stock markets have had many turbulent times in the last 140 years of their existence.

The imposition of wealth and expenditure tax in 1957 by Mr. T.T. Krishnamachari, the

then finance minister, led to a huge fall in the markets. The dividend freeze and tax on

bonus issues in 1958-59 also had a negative impact. War with China in 1962 was another

memorably bad year, with the resultant shortages increasing prices all round. This led to a

ban on forward trading in commodity markets in 1966, which was again a very bad

period, together with the introduction of the Gold Control Act in 1963.

The markets have witnessed several golden times too. Retail investors began participating

in the stock markets in a small way with the dilution of the FERA in 1978. Multinational

companies, with operations in India, were forced to reduce foreign share holding to

below a certain percentage, which led to a compulsory sale of shares or issuance of fresh



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stock. Indian investors, who applied for these shares, encountered a real lottery because

those were the days when the CCI decided the price at which the shares could be issued.

There was no free pricing and their formula was very conservative.

The next big boom and mass participation by retail investors happened in 1980, with the

entry of Mr. Dhirubhai Ambani. Dhirubhai can be said to be the father of modern capital

markets. The Reliance public issue and subsequent issues on various Reliance companies

generated huge interest. The general public was so unfamiliar with share certificates that

Dhirubhai is rumoured to have distributed them to educate people.

Mr. V.P. Singhs fiscal budget in 1984 was pathbreaking for it started the era of

liberalization. The removal of estate duty and reduction of taxes led to a swell in the new

issue market and there was a deluge of companies in 1985. Mr. Manmohan Singh as

Finance Minister came with a reform agenda in 1991 and this led to a resurgence of

interest in the capital markets, only to be punctured by the Harshad Mehta scam in 1992.

The mid-1990s saw a rise in leasing company shares, and hundreds of companies, mainly

listed in Gujarat, and got listed in the BSE. The end- 1990s saw the emergence of Ketan

Parekh and the information, communication and entertainment companies came into the

limelight. This period also coincided with the dotcom bubble in the US, with software

companies being the most favoured stocks. There was a melt down in software stock in

early 2000. Mr. P Chidambaram continued the liberalization and reform process, opening

up of the companies, lifting taxes on long-term gains and introducing short-term turnover

tax. The markets have recovered since then and we have witnessed a sustained rally that

has taken the index over 13000.

Several systemic changes have taken place during the short history of modern capital

markets. The setting up 5of the Securities and Exchange Board (SEBI) in 1992 was a

landmark development. It got its act together, obtained the requisite powers and became

effective in early 2000. The setting up of the National Stock Exchange in 1984, the

introduction of online trading in 1995, the establishment of the depository in 1996, trade

guarantee funds and derivatives trading in 2000, have made the markets safer. The

introduction of the Fraudulent Trade Practices Act, Prevention of Insider Trading Act,

Takeover Code and Corporate Governance Norms, are major developments in the capital



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markets over the last few years that has made the markets attractive to foreign

institutional investors.

This history shows us that retail investors are yet to play a substantial role in the market

as long-term investors. Retail participation in India is very limited considering the overall

savings of households. Investors who hold shares in limited companies and mutual fund

units are about 20-30 million. Those who participated in secondary markets are 2-3

million.

Capital markets will change completely if they grow beyond the cities and stock

exchange centers reach the Indian villages. Both SEBI and retail participants should be

active in spreading market wisdom and empowering investors in planning their finances

and understanding the markets.

3.2 CAPITAL MARKET

Securities market may be classified is by the types of securities bought and sold there.

The broadest classification is based upon whether the securities are new issues or are

already outstanding and owned by investors. Now we see following chart for

understanding market types.


Capital Market

Primary Market Secondary Market


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Primary market:

Securities available for the first time are offered through the primary securities markets.

The issuer may be a brand-new company or one that has been in business for many years.

The securities offered may be a new type for the issuer of additional amounts of a

securities used frequently in the past. In primary market funds are mobilized in the

primary market through prospectus, rights issues, and private placement.

Secondary market:

Once new issues have been purchased by investors, they change hands in the secondary

markets. This market also known as stock market. In India the secondary market consist

of recognized stock exchanges operating under rules, by-laws and regulations duly

approved by the government. There are actually two broad segments of the secondary

markets:

A. Organized market:

Organized exchange are physical marketplaces where the agents of buyers and sellers

operate thorough the auction process. There are number of organized exchanges in India.

NSE (National Stock Exchange) and BSE (Stock Exchange Mumbai) are main stock

exchange. Other than this there are more then 19 stock exchanges.

B. Over The Counter (OTC):

The OTC market is not a central physical marketplace but a collection of broker-dealer

scattered across the country. This market is more a way of doing business than a place.


OrganizedExchanges

Over TheCounter


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Buying and selling inters in unlisted stocks are matched not through the auction process

on the floor of an exchange but through negotiated bidding, over a massive network of

telephone and teletype wires that link thousand of securities firms here and abroad.

MONEY MARKET:

The money market has 2 components-The organized & unorganized. The organized

market is dominated by commercial banks. The other majorparticipants are RBI,

LIC, GIC, and UTI. The main function of it is that of borrowing & lending of short term

funds. On the other hand unorganized money market consists of indigenous bankers &

money lenders. This sector is continuously providing finance for trade as well as personal

consumption.

DERIVATIVES:-

Derivatives are contracts that are based on or derived from some underlying asset,

reference rate, or index. Most common financial derivatives are forwards, futures, options

and swaps.

Derivatives trading commenced in India in June 2000 after SEBI granted the final

approval to this effect in May 2000 for trading in index futures. Currently, the Indian

markets provide equity derivatives of the following types:

Index Futures

Stock Futures

Index Options

Stock Options

Derivatives help to improve market efficiencies because risks can be isolated and sold to

those who are willing to accept them at the least cost. Using derivatives breaks risk into

pieces that can be managed independently. Corporations can keep the risks they are most

comfortable managing and transfer those they do not want to other companies that are



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more willing to accept them. From a market-oriented perspective, derivatives offer the

free trading of financial risks.

NEED FOR DERIVATIVES:The derivatives market caters to the following needs of prospective investors:

Moving the risk from the risk averse to risk taker.

Discovering the current as well as future prices.

Catalyzing entrepreneurial activities.

Increase the volume of savings and investments.

Types of derivatives:

Forwards: it is a customized contract between two parties, where the settlement takes

place on a specific date in the future at the contract price.

Futures: it is an agreement between two parties to exchange commodity or financial

asset for a certain consideration after a specified period. Thee\se types of contracts are

exchange-traded.

Options: it is a type of contract which provides the buyer the right but not the obligation,

to buy or sell a specific asset or commodity at a specific price.\, on or before any time

prior to the specific date.

Warrants: options with longer maturity are refereed to as warrants.

Baskets: these are options on portfolio of underlying assets.

Swaps: it is a contract whereby the parties agree to exchange a predetermined series of

payments, or exchange interest payments or one set of interest payment with another, for

a specified time.



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INFORMATION FLOW IN DERIVATIVE MARKET:-



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One of the important functions of the futures market is to provide hedging facilities to

hedge price risk. This market also provides scope to speculators due to low transaction

cost and leverage. This paper tests whether futures trading is going towards hedging

price risk or towards fulfilling the speculative desires of sophisticated traders.

Being traded in the US for over 100 years commodity futures are still unidentified long

term assets. This may be due to the inflict difference of commodity futures with that of

corporate securities such as stocks, bonds and other conventional assets where, investors

bear the risk during recession period where as investors in commodity futures are

compensated for bearing short-term price fluctuations. The research paper Facts and

Fantasies about Commodity Futures tries to address some commonly raised questions

like future risk and return on investments. The questions are being addressed with respect

to the asset class as a whole, rather than individual commodity futures.

4.1GLOBAL ECONOMY:



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We should consider that we are in a recession and we need to wait for the National Board

of Economic Research (NBER) to opine on whether we have two consecutive quarters of

decline in the Gross Domestic Product (GDP), but that will not happen for up to a year

after the fact. Here are some of the economic factors that lead me to this conclusion:

1. The jobs outlook is detracting. For February the government reported that the economy

lost 63,000 jobs. Actually, the private sector lost 101,000, meaning that government

hiring continues to increase. Due to the way the government counts the impact of births

and deaths, this factor supposedly added 135,000 new jobs. This bit of statistical

chicanery probably means that the real loss in jobs was probably much larger. Moreover,

the unemployment rate fell slightly to 4.8% from 4.9% due to a sharp contraction in the

total number of people looking for work. This is not a good sign.

Generally, employment is a lagging indicator and is is highly unusual to see two months

in a row of job losses and not experience a recession. Yes, that is right; jobs fell in

January as well.

2. The U.S. dollar hit new lows against the basket of nineteen currencies, trading as low

as 72.46. The dollar's weakness is one of the reasons we are seeing the price of most

commodities climb higher, since it takes more dollars to buy such commodities as oil. A

falling dollar is considered good for any companies that exports from the U.S. as their

goods and services are less expensive each time the U.S. Dollar falls. On the other hand,

a falling U.S. dollar depreciates the value of the U.S. government, so investors and

countries that are holding this debt may sell part of their holdings to find higher returns.

If this happens it tends to raise interest rates on this debt, which can cause the U.S. to

experience higher inflation and raises the cost of our own debt. The best scenario is

stability in the U.S. dollar which allows investors to have more confidence in their

holdings.

3. Oil is trading around $105 a barrel. As mentioned part of this high price is due to the

falling U.S. Dollar, as oil is priced in that currency. Part is due to concern that Veneuzela,

Ecuador and Columbia will escalate the current saber rattling and actually go to war. It



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looks like this risk is now over as the presidents of the countries involved have backed

away from their threats and now seem to want to avoid further confrontation. But such is

the story of oil. There seems to be new problems poking its head up all over the world

when there are large reservoirs of oil.

There are 99 of companies that comprise this group. And as Tom said, In the casino

business, they would be known as whales. The whales can and do move the market.

Then they move on to the next thing that interests them and the market gets back to

normal.

4. The index of Leading Economic Indicators (LEI) continues to plunge, and is not far

away from levels last seen in 2001. Such a drop by the LEI has always been accompanied

by a recession. U.S. leading index decreased 0.1 percent which is the fourth straight

month of declines.

5. Personal income for the average U.S. consumer rose by the same amount as inflation,

around 0.4%, and with rising energy and food costs, it is no wonder that retail sales are

down and falling. The savings rate is still negative, which means consumers are using

savings to maintain their consumption.

The world's richest man, Warren Buffett recently said that any reasonable person believes

the U.S. is in a recession.

Going Down from Here

The Federal Reserve has some of the best economists, so it pays to listen to what they

have to say. The table below is from the minutes of the Federal Open Market Committee

(FOMC) held January 30-31, 2008. As you can see the average Fed member is more

bearish now than they were in October. For those of you inclined to read the minutes they

are available at this link.

The Fed's Central Tendency forecast indicates that the U.S. GDP will be 1.3 to 2.0 % for

2008 down from their forecast of 1.8 to 2.5 in October. It looks like their forecasts are

trending down which is not a good sign, especially given the further weakness we are



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now seeing. I suspect we will see an even lower forecast in the release of the minutes

from their next meeting in March.

Of further concern is the upward trend in inflation as measured by the Core PCE now

projected to be 2.0 to 2.2 up from 1.7 to 1.9. First, this is now above the Fed's own target

for inflation which is believed to be below 2.0. Second, with the January Consumer Price

Index reports in at 4.3% tells us that inflation is rising not falling. However, the Fed

expects inflation to fall further later in 2008. Perhaps this is because the economy will be

much weaker than it is now, which will cause downward pressure on prices, helping to

reduce inflation. This is usually what happens during a recession. If so, then that means

they really expect much slower growth. An interesting conflict in their forecasts.

If we see further rate cuts, and many analysts believe there will be, then it is a sign the

Fed is even more worried about economic growth and not as worried about inflation.

Moreover, do not expect the Fed to predict we are in or about to enter a recession. First,

the markets are likely to react much more negatively to such an announcement and the

Fed would not want to take the blame. Second, even though the Fed is an independent

agency it still must report to the Congress. The Fed needs to keep its independence, so it

is very unlikely to forecast the economy is going into a recession. If they did so, many in

congress would want to take away some of their power, thinking the elected

representatives could do better. Talk about out of the frying pan and into the fire, or how

to make a bad situation worse.

Looking for the Bottom

The bear market started with the problems in the mortgage industry that are spilling over

into other parts of the credit arena. Banks and investment firms must have the necessary

liquidity to meet their margins calls and provide sufficient capital to remain a going

business. As a result, investors keep trying to determine if the problems in the mortgage

business will end any time soon.



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As of November, housing was down 8.4%. It is certainly worse now, but that is a place to

start for this discussion. The question is, how much further down can it go? Goldman was

the firm that saw the problems in the mortgage business coming and managed to short

some of the market, thus avoiding the hit to earnings that other financial firms

encountered. According to Goldman if there is no recession, the housing market will fall

by 15%. On the other hand, if there is a recession, then housing prices could fall by 30%.

Ouch! That is substantially more than the 8.4% experienced up through last November.

Along comes First American (FAF), who has calculated how many homeowners will be

experiencing negative equity in their homes if the prices fall 15% and then 30%. It is not

a good picture as the table below shows.

TOTAL % DECLINE IN HOUSINGPRICES

PERCENT MORTGAGES WITH NEGATIVEEQUITY

8.4% (today) 13.5%

15% (No Recession) 21%

30 % (Recession) 39%

If this forecast from Goldman and the analysis from First American is correct, then by the

end of November 13.5% of the mortgages outstanding are backed by homes with

negative equity. This not much of surprises, since many of the mortgages that have been

written in the last few years were with little or no money down. All parties counted on the

appreciation in homes to continue. When the value of the house falls, the borrower is

paying for an asset that is worth less than the outstanding loan(s). This causes people to

walk away from their commitments and the house goes into foreclosure.

If Goldman's prediction of a 15% decline in the value of housing , then 21% of the

outstanding mortgages will be backed by negative equity. Moreover, this is without a

recession. However, we are in a recession, so, according to Goldman, we will see a 30%

decline in the value of homes; and with it, 39% of the mortgages will be backed by

negative equity.

This means the financial crisis we are now experiencing has more to go. There are going

too be more unhappy surprises coming from the financial sector as this problem works



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through the system. Keep in mind that more defaults on these loans cause the banks and

other owners of these credits to experience losses that must be written off. These write

offs cause the institutions to either sell off their good loans or sell additional equity to

meet the minimal capital requirements. But no one wants to buy these loans, since they

are having the same problem. It creates a vicious cycle that brings down the good firms

along with the bad. It also makes borrowing more difficult as rates climb even for the

firms with the best of credit. The recent implosion by Bear Stearns is just one example.

The Fed sees this, which is why they are providing $200 billion in emergency credit and

backing the bail out of the Bear Stearns investors. But so far that hasn't fixed the

problem. I suspect that we will see more failures that will then cause them to buy more of

these securities to get them off the books of these firms. In the mean time the economywill suffer even more.



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4.2 INDIAN ECONOMY:

STOCK MARKETS IN INDIA

Evolution and structure

India is one of the oldest stock markets in the world with a strong presence of domestic

and local intermediation. It was the extent of the indigenous equity broking industry in

India that led to the formation of the Native Share Brokers Association in 1875 which

later came to be known as Bombay Stock Exchange (BSE). As early as in 1864, there

were more than 1,000 brokers in Mumbai trading in stocks. High premiums were also not

something new. At the height of the stock market boom in the 1860s, following the

American Civil War which led to the formation of a large number of joint stock

cotton/ginning mills that stirred the equity culture later booming into what was then

called share mania, share prices reached stratospheric levels. Bombay at that time

enjoyed the distinction of being known as a major financial centre in the Asia region

having headquarters of 31 banks, 20 insurance companies and 62 joint stock companies.

Stock markets in India surged once again following the introduction of a wide range of

economic reforms, with liberalisation of financial markets as one of the central themes.

Buoyed by greater freedom and flexibility, stock markets in India showed growth in thelast one and half decades. Despite major setbacks in the early 1990s and 2000s that led to

extensive investigations into the stock markets by the Joint Parliamentary Committees,

stock markets in India continued to show robust growth.

Some of the fundamental changes that fuelled rapid pace of market growth and at the

same time brought in orderliness in the manner and the conduct of the operations are a

large number of reforms that equipped Indian markets with the best of the processes and

practices that included abolition of open outcry and introduction of electronic trading

(secondary markets), allowing foreign ownership (foreign institutional investment) of

shares, permitting Indian companies to raise capital from abroad (ADRs/GDRs),

expansion in the product range (equities/derivatives/debt), book building process and

transparency in IPO issuance (primary markets), T+2 settlement cycle (payments and



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settlements), depositories for share custody (dematerialization of shares) governance of

the stock exchanges (demutualization and corporatisation of stock exchanges) and

internet trading (e-broking). These changes resulted in dramatic growth of the stock

markets in India as well as the equity broking firms. The broking industry is emerging as

a rapidly growing segment in Indian finance, in terms of business growth, distribution

and network and enterprise value.

Indian stocks markets have an extensive market infrastructure in terms of a large number

of institutions and intermediaries.



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India in Global Markets

The stature and significance of India is growing in the world capital markets. India is not

only attracting greater interest from world markets, but is also assuming increasing

importance in global finance.

a. India is a major recipient of foreign institutional flows amongst the emerging

markets. Since the opening up of domestic stock markets to foreign investors, cumulative

net FII investments reached US$ 67 bn by Nov 07

b. Indian companies are regularly covered by global and regional investment banking

research

c. India is major destination of private equity flows into the emerging markets

d. India was host to the annual meetings/conference of the World Federation of

Exchanges (2005) and International Organization of Securities Commission (IOSCO)

(2007)

e. India emerged a trillion dollar market capitalization market in 2007, and was among

the top 10 stock exchanges in the world in terms of market capitalisation

f. India is amongst the top fifteen stock exchanges in the world in respect of equity

turnover

g. India emerged as a leading player in commodities futures market

h. India is amongst the top five in the number of transactions

i. India is among the top five in respect of volume traded in Stock Index Futures and

Stock Futures

j. India is one of the few markets with extensive dematerialization of shares

k. Indias T+2 securities settlement cycle is on par with the global standards

l. Indian stock markets have largest number of listings. Trading takes place in about

2500-3000 stocks

m. Indias most popular stock index (Sensex) is constructed on the basis of full float

methodology, one of the firsts in the Asia region and a global standard

n. Indian market indices such as Sensex and CNX Nifty are listed in foreign exchanges

for trading as ETFs.



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Recent policy Initiatives

Several policy innovations were evident in the year 2007. A few of the important ones

pertaining to primary and secondary markets, foreign investors, mutual funds and stock

exchanges are summarized below.

1. An Integrated Market Surveillance System (IMSS) that monitors across stock

exchanges (NSE/BSE) and market segments (cash and derivatives) aimed to enhance

efficacy of surveillance function became operational with effect from Dec 1, 2006

2. Listed companies are now required to maintain a minimum level of public share

holding at 25% of the total shares issues with some exceptions

3. Grading of IPOs was made optional. In case an issuer opts for the grading, then these

grades including the unaccepted ones should be disclosed in the detailed and abridged

prospectus

4. Guidelines on issue of Indian Depository Receipts (IDRs) were issued

5. Qualified Institutional Placement (QIP) was facilitated to enable companies raise funds

by way of private placement from Qualified Institutional Buyers. In case of QIP, the

issuer is not required to file a draft offer document with SEBI. Resources raised under

QIP showed a quantum jump in the first eight months of the year

6. BSE and NSE began maintaining a reporting platform for corporate bonds, though

volumes in corporate debt trading remain sluggish. At the instance of SEBI, BSE and

NSE jointly launched a common portal at www.corpfiling.co.in which will disseminate

filings made by companies listed in both the exchanges. In future, when the system

becomes streamlined, a company would be required to file the information only once,

irrespective of the exchange where it is listed



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7. Stock exchanges were advised to update the applicable VAR margin rates at least five

times in a day; by taking the closing price of the previous day, at the start of trading and

the prices at 11.00 am, 12.30 am, 2.00 pm, and at the end of the trading session

8. As a part of strengthening KYC (Know Your Client), Permanent Account Number

(PAN) was made mandatory for all the entities/persons having transactions in cash

market. PAN was made mandatory for all categories of Demat account holders

9. Depository Participants were advised to submit tariff/charge structure to the respective

depositories every year

10. SEBI approved and notified the Corporatisation and Demutualisation Schemes of 19

stock exchanges

11. SEBI communicated the policy of the Government of India in regard to foreign

investments in stock exchanges, depositories and clearing corporations where by:

(a) Foreign investment up to 49% will be allowed in these companies with a separate FDI

cap of 26% and FII cap of 23%

(b) FDI will be allowed with specific prior approval of Foreign Investment Promotion

Board

(c) FIIs will be allowed only through purchases in the secondary markets;

(d) FII shall not seek and will not get representation in the Board of Directors

(e) No foreign investor, including persons in acting in concert, will hold more than five

percent of the equity in these companies

12. Mutual fund trustees are required to certify that the scheme approved by them is a

new product and is not a minor modification of an existing scheme/product

13. SEBI Mutual Fund regulations were amended so as to permit the launch of Capital

Protection Oriented schemes



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14. SEBI directed mutual funds to dispatch statement of accounts to the unit holders

under SIP/STP/SWP on every quarter

15. SEBI allowed the launch of Gold Exchange Traded Funds (GEFTs)

16. SEBI permitted listed companies to send abridged annual report to the shareholders

17. Limits for overseas investments by mutual funds enhanced

18. SEBI approved new derivative products which included; mini-contracts on equity

indices, options with longer life/tenure, volatility index and F&O contracts, Options on

Futures, Bond Indices and F&O contracts, Exchange-Traded Currency (Foreign-

Exchange)Futures and Options and Exchange Traded products to cater to different

investment Strategies

19. SEBI made some important decisions regarding the Participatory Notes (PNs) in Oct

2007, among which is about not allowing FIIs and their sub-accounts to issue/renew

ODIs with underlying as derivatives with immediate effect. It requires them to wind up

the current positions over 18 months, during which period SEBI will review the position

from time to time. SEBI has clarified that there is no proposed bar to ODI contracts,

expiring in Oct 2007 or in the following months, or being renewed, provided the renewal

does not go beyond 18 months. This decision unsettled the foreign institutional investors

resulting in a sharp drop in the markets, but normalcy was back soon after the

clarifications were issued.

Business in stock Exchanges

Business has been exceptionally good in primary and secondary markets, in the equities

and derivatives segments across both the national level stock exchanges. Average daily

turnover in equities segment in NSE rose from Rs 88 bn in Jan 2007 to Rs 198 bn in Dec

2007, and in BSE from Rs 44 bn to Rs 86 bn during this period. Cash market turnover in



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NSE during the first eight months of FY08 reached Rs 25,707 bn showing a y-o-y rise of

33%. Similarly, cash market turnover in BSE rose to Rs 11,602 bn during Apr-Dec 07,

showing a growth of 21% during the first eight months of the year. Turnover in

Derivatives segment in NSE rose to Rs 99,162 bn during Apr-Dec 2007 signifying a

growth of 35 % in the first eight months of the FY08. Average Daily Turnover in the

Derivatives segment in NSE rose from Rs 314 bn in Jan 2007 to Rs 671 bn in Dec 2007.

Net cumulative investments by the Foreign Institutional Investors reached US$ 67 bn by

Nov 2007, and during the first eight months the gross purchases and sales by the FIIs

amounted to Rs 5,972 bn and Rs 5,321 bn respectively. BSE Sensex closed at 20286 in

Dec 07 from a level of 13,827.77 in Jan 2007, showing a rise of 46.7 % during the year.

During this period, it touched a low of 12316 and a high of 20498. S&P CNX Nifty rose

from 4007.4 on Jan 2, 2007 to 6138.6 on Dec 31, 2007 and showing a growth of 54.8%

(local currency) based on monthly averages of index movement. Except some parts of the

information technology, most of the sectors witnessed sizeable spurt in the stock prices.

Primary markets too were very robust. During the period Apr-Nov 2007, capital

mobilized through public issues, rights issues, qualified institutional placements, and

preferential allotments reached Rs 927 bn in 300 issues as compared to Rs 339 bn in 334

issues showing a growth of 173% during the same period last year. During this period,

amount raised from IPOs increased from Rs 151 bn to Rs 246 bn. In the first eight

months of FY08, 19 issues were offered under Qualified Institutions Placement that

raised Rs 127 bn, as compared to the 10 issues that raised Rs 20 bn in the first eight

months of FY07. Preferential allotments too showed high growth; from Rs 145 bn in 257

issues in Apr-Nov 2006 to Rs 339 bn during Apr-Nov 2007 (133%) in 231 issues. The

NSE and BSE reported private placement of corporate debt to the tune of Rs 776 bn

during Apr-Nov 2007. Trading in corporate debt at the exchanges for the first eight

months of FY08 amounted to Rs 325 bn in BSE and Rs 214 bn in NSE. During the same

period, mutual funds mobilised Rs 1,351 bn as against Rs 1,008 bn during the same

period last year.



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By Jan 2008, 235 bn shares were under dematerialized form with the National Securities

Depository Ltd and 42 bn shares with Central Depository Services Ltd. Shares of about

7,000 companies are under dematerialization. The market capitalization of shares under

dematerialization rose from Rs 38,769 bn in Apr 2007 to Rs 64,691 bn in Nov 2007.

There are about 7,000 DP locations in the country. NSDL holds 9 million depository

accounts with a geographical coverage of 792 cities and towns.

Market Intermediaries

The number of stock brokers registered with Securities and Exchange Board of India

showed a net increase of 108 from 9,335 in FY06 to 9,443 in FY07. There were 263

additions and 155 cancellations during the year. National Stock Exchange of India has the

highest number of brokers (1077) followed by Calcutta Stock Exchange (960), Inter-

Connected Stock Exchange (925) and BSE (901). The proportion of corporate members

at NSE was at 92% and at BSE at 76%. The number of sub brokers registered during

FY07 rose from 23,479 in FY06 to 27,541. NSE and BSE account for 95% of all sub

brokers. This segment showed a growth of 17.3% during the year. As on Jan 25, 2007,

1,269 Foreign Institutional Investors and 3,760 Sub Accounts were registered with SEBI.

As on Mar 31, 2007, 40 mutual funds were registered with SEBI of which 33 were in the

private sector and seven in the public sector. The number of domestic venture capital

funds rose to 90 during FY07 from 80 in the previous year. Number of foreign venture

funds doubled from 39 to 78 during the period. The fees charged of market intermediaries

by the regulator rose from Rs 580 mn to Rs 2,010 mn. Major heads that generated fees

included take over fees (Rs 520 mn), stock brokers and sub-brokers (Rs 450 mn), offer

documents/prospects (Rs 340 mn), mutual funds (Rs 210 mn), derivative members (Rs

110 mn) and FIIs (Rs 90 mn). As a part of investigations, SEBI suspended 52 market

intermediaries, issued warning to 27 intermediaries and prohibitive directions issued to

345 intermediaries and non intermediaries during FY07.

An important feature of the Indian stock markets as compared to other emerging markets

as also developed markets is the large number of listed companies and also a good



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number of member brokers. While the share of top securities in the total turnover is

declining over the years, the share of top brokers in trading volumes is increasing. For

instance in FY01, the top 10 securities accounted for 70% of the turnover in BSE which

gradually fell to 24% in FY07. Similarly in NSE, the top 10 securities accounted for 73%

of the volume in FY01, which came down to 28% in FY07. The top 100 securities now

account for 71% of the trading volume in BSE and 84% in NSE. The top 10 members of

BSE, who accounted for 14% of the turnover in cash segment in FY01, saw their share

climbing to 24% in FY07. In NSE, the share of top members rose from 13% to 25%

during FY01-07. The top 100 members now account for 73% and 75% of the cash market

turnover of BSE and NSE respectively.

Commodities futures markets, which began in India in the early 2000s, are showing rapid

growth and progress. Total value of trading at all commodities exchanges for the period

Apr 2, 2007 - Jan 31, 2008 stood at Rs 31,610 bn as against Rs 30,313 bn during the

corresponding period in FY07. Commodities futures markets in India have taken off in a

big way; but concerns arising from sharp spurt in prices of certain essential commodities

and limits imposed on trading of a few agricultural commodities dampened the growth in

their volumes, though trading in other commodities continues to grow. Though a large

number of equity broking houses offer commodities trading also, exclusive commodity

brokerages are emerging as a separate class.

IMPACT OF FDI ON INDIAN ECONOMY:

LATELY INDIA has emerged as the latest and the most sort after destination for FDI,

reasons for this are many. Being the 10th largest economy in the world and the 4th in

terms of PPP India has emerged as a potential player for FDI and NRI investment. India

has a large reservoir of skilled laborer at internationally competitive cost and a large

entrepreneurial base and a diversified manufacturing structure makes it easy to find

partners for collaborations. The country has a vast scientific and technical manpower of

over 20 million whose size exceeds the population of Taiwan .The number of literates in

India is more than the combined population of France and Japan.



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India has a vast domestic market of 300 million strong middle class population having a

substantial purchasing power and another 700 million people whose capacity to purchase

is gradually increasing. Being a vibrant democracy with a large democratic setup together

with a broad based legal framework including arbitration and an independent judicial

system coupled with a vast network of bank branches, financial institutions and well-

organized capital and money markets makes India a favorable destination for FDI and

NRI investments. The country also has a huge network of technical and management

institutions of highest international standards for development of excellent human

resources. India has a record of meeting its international financial obligations as per

schedule and has never been a defaulter. The country has a strong English language base

for business purposes .The strong and vibrant small-scale sector is again good for

establishing strategic alliances with the foreign counterparts. Strategic location of the

country for the third world markets particularly for the rapidly growing South and South

East Asian countries together with a supportive infra structure base helps in generating a

healthy environment for FDI inflow into the country.

A recent international agency report has predicted that the Indian economy will become

one of the worlds largest by 2050 A.D. What became as a drizzle in the 1980s the boom

time of the Indian economy is now pouring in torrents like the Indian monsoonal rains.

With a GDP growth rate of 8 per cent since 2003 starting with a rebound in the Indian

agriculture initially but now followed with a boom in manufacturing and service

industries similar to that of China.

In the last couple of months there has been a series of announcements of big investments

by big foreign and NRI companies. Bill Gates in his recent visit to India has announced

that the Microsoft will invest around $ 1.7 billion over the next four years in India. Intel

the largest computer chips company of the world has decided to invest over $ 1 billion in

India. CISCO has announced plans to spend $ 1.1 billion over the next 3- 4 years in India.

For Microsoft India is emerging as a big market to exploit as Microsoft doesnt have

much in stake in China. Buying of shares to the tune of $ 1.5 Billion in Bharti-Tele

ventures by Vodaphone is another big FDI inflow into the country. To be a genuine

competitor of China in FDI, India should aim to an annual growth rate of 10 percent



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which the Indian Prime Minister Dr Manmohan Singh has also rightly pointed out

recently. So far India has not attracted more then $ 3-4 Billion annually when compared

to FDI inflows of $ 55- 60 Billion for China. The number of foreign and NRI equities

which have invested in India between August 1991 November 2002 is 15761 with a

total foreign investment of Rupees 283447 Crores. However things are improving in

India too. FDI investment in India has nearly doubled to $2.9 billion during April July

2006 from $ 1.5 billion for the same period last year representing a growth rate of 259 %.

According to the RBI India has received $50.1 billion since 1991 of which $16 billion or

32% of it came since April 2004.

The negative side of this bouncing FDI and NRI inflow is the constraints of Indian

economic growth which are not external but internal .Ups and downs in Indian

agriculture plays a major role in constraining Indian growth rate coupled with unhealthy

infrastructure like pot holed roads, incomplete flyovers, undeveloped airport facilities etc

are the main bottlenecks in the growth of the Indian economy.

Again lopsided regional variation in the economic growth of the country is another major

impediment in the growth of Indian economy. Truant Left Parties whose support is

crucial for the survival of the UPA government at the center is another major hindrance

in the inflow to FDI investment in India.

However a very reassuring development has been the tremendous boost up which the

recent budget has given to industrial infrastructure and FDI investment in India. Positive

side of the story is the tremendous resilience of the Indian economy, rapid growth of

Indian agriculture, boost up to infrastructure, the tremendous global outsourcing boom in

India and a well-regulated and deep capital market. Looking at the current rate of FDI

inflow India can attract a record of $ 12 billion FDI inflow this fiscal year. The

commerce minister feels it is possible though he has a note of caution, There iscompetition not only just from China but also from others like Thailand, Malaysia and so

on. We cant lose focus on attracting investments since we cant get inflows by giving

lectures but work on ways to get investors.



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If a comparative analysis of the Indian and Chinese economy is done some interesting

comparison emerges through India lags behind China in many areas a lot needs to be

done if India has to catch up with China. Indias total population is 1033 billion; Chinas

is 1272 billion. Indias labor force is 451 billion; Chinas labor force is 757 billion.

Indias annual GDP is 478 US $ billion, Chinas is US $ 1159 billion. 27 per cent is the

share of Indian agriculture in its GDP in China it is only 15 per cent .27 per cent is the

share of industry in Indian GDP in China it is 52 per cent. 48 per cent of GDP in India

comes from services in China it is only 33 percent. Rail routes in India are 62.5 thousand

sq kms in China it is only 56.7 thousand sq kms. Motor vehicles per 1000 people in India

are 7 in China it is 8. R& D expenditure in India is 0.6 % of GNP in China it is 0.1 %.

Internet host in India is 0.8 per 10000 people in China it is 0.6 per 10000. Education

expenditure in India is 3.2 per cent of GNP and in China it is 2.3 per cent.

Undernourished people in India are 23 per cent of the total population in China it is only

9 per cent.

Thus if we look into the overall scene of Indian economy with a booming stock touching

almost the 14000 mark, a buoyant Rupee of Rs 43.44 /Dollar and a healthy growth trend

of the major sectors of the Indian economy the environment is very positive for FDI and

NRI inflows. However compared to China it is still behind even though it is marching

ahead. A lot more needs to be done. The Indian bull is no doubt energetic now however it

has to run fast to overtake the Chinese dragon which is not impossible if friendly ground

is created.



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Dealing with the Impact of the Global Financial Crisis

Eleven Point Agenda for Indian Economy: Key Issues

Domestic liquidity shortage

Exchange rate volatility and reduction in access to foreign currency funds Inadequate

credit availability and slowdown in demand

Decline in business and investor confidence and optimism

Highlights of RecommendationsCredit Flow & Impetus to Growth

Establishment of a corpus for lending to SMEs

Speedy release of government funds for various projects to ensure timely

implementation and generation of economic activity

Fast tracking of all infrastructure projects to spur investments and growth through inter-

sectoral linkages

Domestic Liquidity & Interest Rates

Further reduction in repo rate by at least 50 bps and in CRR by 150 bps to ensure

adequate liquidity and reasonable cost of funding

Provision of liquidity to mutual fund and NBFC sectors, to enable orderly operation of

financial markets

Guarantee for all bank deposits for a two year period, to maintain depositor confidence

in the banking sector



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Foreign Exchange Management

Focused exchange rate management to prevent volatility without reducing rupee

liquidity

Permitting higher levels of FDI in order to attract foreign capital

Utilization of foreign exchange reserves for meeting critical foreign currency needs

Removal of the cap on NRE and FCNR (B) deposits

Communication

Comprehensive communication exercise by Government and regulators in consultation

with industry to articulate the approach to mitigate risks arising out of the global

financial crisis and strengthen confidence in the economy

Investment Boom: The Role of Fiscal Reforms

The unprecedented economic growth of last four years has been the result of the interplay

between both demand and supply side factors. Amongst the demand side factors, robust

investment growth has been one of the major ones. Gross capital formation (GCF) has

been growing twice as fast as the gross domestic product (GDP) in recent years, thereby

increasing its share in the GDP pie. As a percentage of GDP, the share of gross capital

formation has increased from 22 per cent in 2001-02 to over 36 per cent in 2007- 08 (as

per the CSO advance estimates).



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The growth momentum has clearly changed gears from consumption-led growth to being

an Investment-led growth since 2001-02. The growth rate of investment peaked in 2004-

05 and has slowed down in recent years. It however, continues to be much above the

growth of consumption. Unlike the consumption slowdown, which has been hit by the

tight monetary policy of the RBI, there were little signs until recently that investment has

been dented significantly. The increase in the deployment of incremental credit to capital

goods in 2007-08 also points towards the continuation of strong investment trends in the

economy.

In recent months tentative signs of slowdown in investment activity have emerged. In

January 2008, the capital goods sector clocked a disappointing 2.1 per cent growth - the

lowest for nearly six years. While a blip in growth of capital goods sector for one month

is too early to represent a downturn in investment, it is a cause of worry - more so, if

consumption side is already reeling under a downturn due to high interest rates prevailing

in the economy.

Further analysis done on the trend growth rate of GDP and gross fixed capital formation

(GFCF) also throws up some interesting insights first, both GDP and GFCF have been

growing at the rate which is below their respective trend values at 8.5 and 16.8 percent.

Second, the business cycles of GDP and investment had been pro-cyclical until 2003-04

however, since then the pattern of growth has been different. Investment grew rapidly

and much above its long run trend for couple of years when GDP was in fact growing

below its trend. Why has investment turned counter-cyclical in recent years?

The improvement in investment has been driven by a significant increase in the private

corporate sector's investment which has doubled as a share of GDP in a matter of four

years - from 6.6 per cent in 2003-04 to 14.5 per cent in 2006-07. Over the same period,

government investment increased from 6.3 per cent of GDP to 7.8 percent. What did

private investment grow rapidly compared to GDP after 2001-02 and experience a

relative slowdown in its growth in recent years when the GDP growth was at all time



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high? To find answers to the discerning questions raised above regarding the investment

growth overriding the GDP growth, one needs to probe the fiscal side of the story. At the

beginning of the reform process in 1991, fiscal imbalance was identified as the root cause

of the balance of payments crisis and domestic inflation. The fiscal consolidation, which

followed in response, however failed to sustain itself as it lacked a statutory mandate and

the required institutional support. The enactment of the Fiscal Responsibility and Budget

Management Act (FRBMA), 2003, however, provided the required mandate and lent

credibility to the fiscal reforms process of the government. The fiscal deficit of the centre

as a proportion of GDP has come down from 5.9 per cent in 2002-03 to 3.1 per cent in

2007-08 and is further estimated to decline to 2.5 per cent in 2008-08. Similarly, the

revenue deficit also declined from 4.4 per cent in 2002-03 to 1.4 per cent in 2007-08 and

is estimated to decline to 1.0 per cent by the next year. The fiscal performance of the state

governments has also shown considerable improvement, post FRBMA.

Private sector savings and investment decisions are affected by the fiscal consolidation

steps undertaken by the government both in response to specific revenue and outlays

measures and also as a result of the improved economic outlook that results from the

improved fiscal consolidation. The gradual reduction in both the fiscal and revenue

deficit mandated under the FRBM by the central government has improved its credibility

in the regard that it is serious enough to curtail non-developmental expe

global finanacial crisis - impact on indian stock market

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