Impact Of Global Fin Crisis

Impact of Global Financial Crisis on the Indian Capital Market by

Shomesh Kumar Head, Equity Derivatives Karvy Stock Broking Ltd Dec 13,2008 Karvy Stock Broking Ltd.

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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. Karvy Stock Broking Ltd.

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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. Karvy Stock Broking Ltd.

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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. Karvy Stock Broking Ltd.

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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 0

Percent (%)

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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. Karvy Stock Broking Ltd.

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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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