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Impact of Global Financial Crisis

on the Indian Capital Market


by
Shomesh Kumar
Head, Equity Derivatives
Karvy Stock Broking Ltd

Dec 13,2008

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The Beginning
□High growth rates across the countries
in the world.
□Lower rate of interest (until 2004 in the
US) causing rapid increase in credit as
mortgages becomes more affordable.
□The situation led to an increase in asset
prices causing a housing boom across
the globe.

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The Beginning
□Fuel, metal and subsequently other
commodity prices started to rise
causing high inflation.
□Un-ethical banking practices and poor
regulations fed bubbles in housing
markets.
□To curb the rising inflation, US Fed
started increasing interest rate post the
year 2004.

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The Beginning
□Subprime borrowers started defaulting
under the pressure of rising interest rates
forcing bank’s asset quality to decrease
significantly.
□The mortgage lenders such as New
Century, Argent and Countrywide were the
first among the causalities.
□The crisis extended to the banking sector
as the banks started breaking down.

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The Beginning
□Freddie Mac and Fannie Mae were bailed
out by the US government.
□The crisis extended to the stock
markets.
□JPMorgan Chase and the federal
government teamed up on a bailout of
Bear Stearns.
□Lehman Brothers filed for bankruptcy.

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The Beginning
□Merrill Lynch was bailed by the Bank of
America.
□Morgan Stanley and Goldman Sachs
convert themselves into Federal Bank
Holding Companies.

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Impact
□The U.S. financial crisis has had its
reverberations on both developed and
developing world.

□The impact of global financial turmoil


has been felt particularly in the equity
markets across the globe.

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Impact
P e r c e n ta g e R e tu r n s in c e J a n u a r y

- 10

-20
Percent (%)

-30

-40

- 50

-60

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Impact
□Foreign investors have left the Indian
market in droves, selling off $9.6 billion
worth of shares in the first nine months of
this year to cover up the losses.
□It is a sharp reversal of last year's record
inflow of $17.2 billion into the Indian
capital market.
□Some analysts predict that the final
outflow for 2008 could reach $13.5 billion.

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Impact
□The cumulative market capitalisation of
Indian shares, which was $1.8 trillion in
January, has slumped even more
dramatically to $760 billion.
□The valuation of assets held by the
mutual funds saw a significant decline.
Lackluster inflow of fresh cash has
further added to their woes

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Impact
□Even new schemes, launched in the
recent past, have failed to attract
investors, which seems to have left the
industry struggling for funds.
□With most of the economies on the
threshold of recession, the EPS and the
growth rate is expected to decline
significantly, propelling the lower
valuations for the stock.

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Impact
□Capital expenditure plans have been
placed on the back foot with markets
reeling under severe liquidity crunch.
□Outlier scenarios entailing falling incomes
and double-digit unemployment are
creeping into the picture.
□The confidence among the investors
community has taken a severe beating.
Revival might take longer time periods.

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Impact
□The volumes traded declined significantly to
Rs40,000 crore from over Rs1,25,000 crore.
□To ease the cash squeeze and spur economic
growth, the RBI cut the SLR, the CRR and the
repo rate.
□The meltdown has reduced the availability of
international capital both in debt and equity.

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Thank You

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