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ASPIRE’08

A
Paper on

U.S. Sub-prime crisis & its


effect on Indian Stock Market
By
Ritesh Bhusari
(MITSOM)
Introduction:
• The sub-prime mortgage market,
which resulted in high credit risk
and counter-party risk in the US,
is still facing uncertainties and
financial instability — an
offshoot of imprudent policies of
US banks and other financial
institutions operating there. In
fact, financial markets across the
world have been turbulent.
The circular flow of income

INJECTIONS

Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)

Factor domestically
BANKS, etc GOV.
payments produced goods
and services (Cd)

Net
Net taxes (T)
saving (S)

WITHDRAWALS
Overview of sub-prime mortgage industry
• Mortgage
• Sub-prime Mortgage
• Some of the sub-prime
mortgages include
Interest-only mortgages
Pick a payment
Initial fixed rate mortgages
• The current sub-prime mortgage
crisis in US
Bad effects on Financial Institutions of U.S.
due to sub-prime mortgage industry:

• Merrill Lynch
• American Home Mortgage Investment
Corporation
• Mortgage Guaranty Insurance Corporation
• Goldman Sachs
• Citigroup
Factors Which Drives Stock
Market
• Three Es i.e. Economy (both global
as well as domestic), Earning &
Emotions
• Domestic factors
Domestic political scenario
Domestic business scenario
Inflation
• Natural and artificial calamities
• Supply & Demand
Can India withstand US economic
shock
• The fundamentals of Indian economy
are sound
• Growth momentum of the country at
9-9.5 percent per annum
• Inflation is under control 3-4
• We will not suffer the problem that
U.S. is now suffering, since our banks
do not have indiscriminate lending
• China would be more affected than
India
How the US sub-prime crisis does
influence the Indian Stock market?
ffffffffffffffffffff
Some Reasons
• FIIs reeling under the impact of non-
performing or bad loans originating
in the US sub-prime market. It is
likely to slowdown, or even reverses,
the flow of foreign direct investments
in the Indian economy
• Property prices here have grown
tremendously; borrowing and lending
rates have seen gradual increases;
banks and other lending institutions
have recorded an increase in their
non-performing assets.
Some Reasons
• Due to the huge losses in banking business in U.S., many
giant banks facing problem of heavy dead asset &
ultimately less liquidity, So now to rescue themselves from
bankruptcy they are entering in to the Asian markets to
mobilize funds. Because of this unexpected entrance by
U.S. banks, flow of funds from Asian market going to west
& there is slowdown of funds flowing to India from this
East Asian market.
• Many foreign banks have converted their risky mortgage
loan in to Wall street investment and many Indian financial
institutions have invested there in huge amount, So certainly
whatever happen at Wall street it will affect Dallal street
Some Reasons
• Crude oil prices
• Due to the appreciation in rupee our
export business’ balance sheet was heated
worst & hence lost their stock value
• Recession in the U.S. will mean less
import by it from Asian manufacturers
like China & India thus loosing business
& ultimately loosing stock value.
Possible solutions
• FFIs, FI, & foreign VCFs, will have
a minimum lock in period of one
year, if the investment occurs
during preceding 12 months before
the IPO date
• We should more focus on our
primary & secondary economic
sector rather than tertiary
• Upper & lower circuit for
derivative market products i.e.
Futures & Options
Possible solutions
• RBI will have to discover additional
instruments such as issue of dollar/euro
bond to mop up foreign ex-change
inflows & control monetary expansion
• Decoupling, if possible
• International Monetary Fund (IMF) &
World Bank could practice SDRs
(Special Drawing Rights)
• As an investor, we need not to be very
panic
Conclusion
• It may be noted that the stock market is still
flush with liquidity and money has not
moved out of country
• FIIs that entered the market to unload their
position for profit making will not do so
now because foreign markets are not safe
• Moreover, there cannot be a stock market
driven policy, but regular intervention are
necessary by regulatory bodies like SEBI &
RBI
• Market is still bullish on the banking, power,
media, and metals ferrous and mining sector
and also on the undervalued pharmaceutical
sector.
Queries! Please