Phd. Thesis

torU.S FINANCIAL CRISIS AND ITS IMPACT ON INDIAN MARKETS INTRODUCTION To curb the liquidity crises the RBI will continue to initiate liquidity measures as long as the current unusually tight domestic liquidity environment prevails. The current step to curb these being lowering of interest rates and reduction of PLR. However, the big-picture story remains unchanged – all countries in the world with current account deficits and strong credit cycles are finding it difficult to bring cost of capital down in the current environment. India is no different. New measures do not change our view on the growth outlook. Indeed, we remain concerned about the banking sector and financial sector. The BOP- Balance of Payment deficit – at a time when domestic credit demand is very high – is resulting in a vicious loop of reduced access to liquidity, slowing growth, and increased risk-aversion in the financial system. In total the recession have turned down the growth process and have set the minds of economists and others for finding out the real solution to sustain the economic growth and stability of the market which is desired for the smooth running of the economy. Complete businesses/ industry is in dolled rum situation and this situation persist for a longer duration will create the small business to vanish as they have lower stability and to run smoothly require continuous flow of liquidity which is derived from the market. In present situation down fall in one sector one day leads to a negative impact on the other sector thus altogether everyone feel the impact of the Financial crises with the result of the current recession which started in US and slowly and gradually due to linked global world have impacted everyone. Solution for the problem still remain at the top of the mind of every one, still everyone facing the impact of recession but how long is the major question which is of great importance. The economic news at the beginning of the New Year has made for grim reading. Headlines hype to attract attention and journalists simplify, but the collective media assessment of 2008 is clearly “economic crisis” and the forecast for 2009 is clearly “economic challenge”. And by any measure, the past few months have been extremely difficult for the global economy. Following the financial services turmoil in September, we can see how the bursting of the credit bubble has caused a severe economic downturn with major repercussions across the world. Yet the “credit crunch” actually started in 2007 and the downturn has been evident in many sectors and countries for sometime — indeed the US economy appears to have already gone into recession by December 2007. If we had assessed the 12 months to August 2008, many headlines would have been very different. A year that ended with oil priced at US$37-40 a barrel also saw record highs of US$135-140. A year that saw sterling fall to record lows started with discussions about the flight from the dollar. A year that saw grandiose statements about the “reversal of globalization” and the final emergence of the “emerging economies” ended with the Chinese stock market seeing the worst falls of any major exchange and many of the new Russian economic powerhouses grinding to a halt under the weight of debt. Volatility and rapid change do not make for a simple and predictable narrative. The task of management has become even harder. As the supply of historically cheap credit that characterized the past decade has been turned off, the growth of many companies has faltered. Major economies in Western Europe and the US have now entered recession and global growth has slowed significantly. No longer fuelled by cheap and large loans, property prices have fallen and many business models have come under great stress. Consumer spending falls and so do the prospects for employment and export-led economies.

Yet some companies continue to prosper. The Times of London reported at the New Year that “those fortunate to hold shares in British Energy would have reaped gains of 40 and 20 percent respectively.” The top investment fund in the UK saw returns of 80%. Without disputing the poor state of the economy or minimizing the real misery that many individuals are experiencing, we encourage people to get behind the headlines and get deeper into the detail. Some complexity is best not avoided. There is opportunity in the adversity of the worst of markets. Factors responding to the crisis A number of factors are impacting business around the world: •

Financing costs have increased as banks tighten their lending standards.

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Slowing economic growth: the IMF expects the world economy to grow on average by only 0.5% in 2009, revising its forecast down significantly. Developed economies are expected to contract to an average of -2% in 2009 — the first such fall since the 1940s. Growth in emerging economies will slow to an average of 3.3% in 2009.

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Rising unemployment and falling consumer confidence are impacting revenue growth.

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Falling profits: analysts are lowering corporate forecasts as the recession bites.

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Government intervention and potential regulation is changing the operation of the market. Equally, market volatility has increased significantly, making planning difficult:

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Risk spreads on corporate bonds have soared to record levels and ratings agencies have downgraded many corporates, greatly increasing financing costs for firms seeking credit.

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Many currencies have suffered volatility as global investors continue to assess strength of economies thus undermining financial arbitrage strategies.

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Commodities and energy: the slowdown in global demand has led to a fall in commodity prices to six-year lows. Oil has fallen over US$100 a barrel based on the gloomy economic outlook and falling demand.

As a consequence, we are seeing an increase in stressed companies across the world. A record number of companies are expected to go bankrupt in 2009 with 2,00,000 insolvencies predicted in Europe alone — according to world’s largest credit insurer Euler Hermes. In the US there is likely to be an explosion of failed businesses as an estimated 62,000 firms go under this year compared with 42,000 in 2008. More companies are likely to breach their loan covenants in 2009 as the slowdown intensifies, prompting a surge in company restructuring and failures. But this is not the first recession — and the business world has experienced serious downturns before. Opportunities in adversity What has immediately emerged from our study is that not all companies are equally affected by the downturn and that a sizable minority see opportunities from the current crisis — albeit also recognizing the threats. Whilst the overall impact on market capitalization has been extremely negative in the past 12 months, there is significant variation in performance by sector. Taking the aggregate market capitalization of the top 30 companies, per sector, in a particular economy (Europe) reveals this. Aggregate market capitalization change varies from an astonishing fall of 65% in the banking sector to virtually no fall at all in the biotechnology sector. It may be a miserable year to have been an investor but there were clearly choices that could have been made in portfolio scope that would have had dramatically different impacts. Those choices will be available again in the coming year.

The executives recognize the challenge to their business but only 30% felt their focus for the next 12 months would be on corporate survival. 70% believe there are opportunities to do more. While 35% reported a significant deterioration in the profitability of their sector, only 22% reported such a problem for their own company — indeed 15% reported some improvement in profitability over the past 12 months. Similarly, their perspective of development in the competitive environment was also mixed. Price competition has increased for most — significantly so for almost a quarter of respondents — but other developments offer opportunity: •

40% are seeing reduced risk of new entrants

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30% are seeing competitors withdraw from their market; and

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11% are seeing an increase in bankruptcies among competitors.

This is the harsh reality of competition — performance is relative and the misfortune of your competitors can provide the greatest of opportunities. According to their survey 72% reported that they had increased their focus on key accounts — with the increased service that this implies for their customers. 39% reported that they had launched new products and services and 34% had moved to broaden their customer base by entering new markets. These are tough challenges but they speak of new opportunities. Balancing the upside, however, smaller but significant numbers of respondents talked about terminating high-risk contracts, losing customers to bankruptcy and having customers end contracts with them. Recently, Air India announces that the employees of Air India can take leave up to 5 years and they can join any other companies, this is the latest announcement by Air India to reduce the salary burden. Conclusion In times of great uncertainty and stress, there is a temptation to wait and see. Maybe tomorrow there will be more clarity as to risks, maybe things will have improved and tough decisions can be delayed. And survey conducted by Economists shows that — the almost 30% of the Industries who have not increased their focus on their customers, the 16% who have not begun to think about cost savings or the 40% who are taking increased time to action their plans concerning reshaping their business. From our perspective, we believe it is necessary to recognize that the crunch has happened, and that its consequences will continue to emerge. Past actions can be regretted but they cannot be reversed. The future, however, can be different and that is where management must focus. We believe that now is the time for leaders and management: •

To quickly focus on cash and your exposure to the downturn. The greater your liquidity, the greater your options and your prospects of success. Understand the impact on your clients and your suppliers. Seek to understand the impact on your competitors.

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To seek to know your situation and your options. Now is the time to be serious about risk management — not as procedural compliance but as the process for evaluating future actions and consequences.

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To focus on the performance of your team and your assets. When markets are tough and resources are scarce, this is the time to be ensuring that you are making both efficiency and effectiveness gains. Performance is relative — for even the most distressed of companies.

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To focus on driving the changes in the organization to match the changed environment that we have entered and to deliver the performance that will shape the market of the future.

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To be bold about the opportunities that does exist to fundamentally change the competitive position of your organization to not just survive the economic downturn but to thrive and build a position to rebound when conditions change.

Finally, The Companies and Management may follow the simple suggestions to protect themselves from the Global Recession. • ○ “Securing your present” ○ “Protecting your assets” ○ “Improving your performance” ○ “Reshaping your business” ○ “Sustaining your future” Impact of Global Recession on Indian Market

The recession in the US

market and the global meltdown termed as Global

recession have engulfed complete world ecomony with a varying degree of recessional impact. World over the impact has diversified and its impact can be observed from the very fact of falling Stock market, recession in jobs availiability and companies following downsizaing in the existing available staff and cutting down of the perks and salary corrections. Globally the financial sector sacking the existing base of employees in high numbers in US the major example being CITI Group same still followed by others in hospitality industry Jet and Kingfisher Airlines too. The cut in salary for the pilots being 90 % can any one imagine such a huge cut in salary. In the globalized market scenario, the impact of recession at one place/ indusrty/ sector perculate down to all the linked indusrty and this can be truly interpreated from the current market situation which is faced by the world since approx 2 month and still the situation is not in control inspite of various measures taken to fight back the recession in the

market.The badly hit setor at present being the

financial sector, and major issue being the "LIQUIDITY Crises" in the In-spite of the various measures to subsidise the impact of the down the inflation present nothing really sound have been done.

market. recession and cut

Various steps taken by RBI to curb the present recession in the economy and counter act the prevailing situation. The sudden drying-up of capital inflows from the FDI which were invested in Indian stock markets for greater returns vizualizing the Potential Higher Returns flying back is continuing to challenge liquidity management.At the heart of the current liquidity tightening is the balance of payments deficit, and this NRI deposit move should help in some small way. To curb the liquidity crises the RBI will continue to initiate liquidity measures as long as the current unusually tight domestic liquidity environment prevails. The current step to curb these being lowering of interest rates and reduction of PLR.However, the big-picture story remains unchanged – all countries in the world with current account deficits and strong credit cycles are finding it difficult to bring cost of capital down in the current environment. India is no different. New measures do not change our view on the growth outlook. Indeed, we remain concerned about the banking sector and financial sector. The BOP- Balance of Payment deficit – at a time when domestic credit demand is very high – is resulting in a vicious loop of reduced access to liquidity, slowing growth, and increased risk-aversion in the financial system. In total the recession have turned down the growth process and have set the minds of economists and others for finding out the real solution to sustain the economic growth and stability of the

market which is desired for the smooth running of the economy.

Complete businesss/ industry is in dolledrum situation and this situation persist for a longer duration will create the small business to vanish as they have lower stability and to run smoothly require continous flow of liquidity which is drived from the

market.

In present situation down fall in one sector one day leads to a negative impact on the other sector thus alltogether everyone feel the impact of the

Financial crises with the result of

the current recession which started in US and slowly and gradually due to linked global world have impacted everyone. Solution for the problem still remain at the top of the mind of every one, still everyone facing the impact of importance.

recession but how long is the major question which is of great