2008 has been an extremely challenging year for street across the globe. The economic slowdown of the advanced countries which started around mid-2007, as a result of sub-prime crisis in USA, led to the spread of economic crisis across the globe. Many financial institutions like Lehman Brothers or Washington Mutual or General Motors collapsed and several became bankrupt in this crisis. According to the current available assessment of the IMF, the global economy is projected to contract by 1.4 per cent in 2009. Even as recently as six months ago, there was a view that the fallout of the crisis will remain confined only to the financial sector of advanced economies and at the most there would be a shallow effect on emerging economies. These expectations, as it now turns out, have been belied. The contagion has traversed from the financial to the real sector; and it now looks like the recession will be deeper and the recovery longer than earlier anticipated. Many economists are now predicting that this ‘Great Recession’ of 2008-09 will be the worst global recession since the 1930s.
Despite of some mitigating factors, Emerging economy like “India” too has to weather the negative impact of the crisis due to rising two-way trade in goods and services and financial integration with the rest of the world. Today, Emerging economy is certainly more integrated into the world economy than fifteen years ago. Although emerging economy banks have very limited exposure to the US mortgage market, directly or through derivatives, emerging economy is experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels – all of which are coming on top of the already expected cyclical moderation in growth.
Despite of some mitigating factors, Emerging economy like “India” too has to weather the negative impact of the crisis due to rising two-way trade in goods and services and financial integration with the rest of the world. Today, Emerging economy is certainly more integrated into the world economy than fifteen years ago. Although emerging economy banks have very limited exposure to the US mortgage market, directly or through derivatives, emerging economy is experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels – all of which are coming on top of the already expected cyclical moderation in growth.
I. Stock Market (BSE)
The economy and the stock market are closely related as the buoyancy of the economy gets reflected in the stock market. Due to the impact of global economic recession, Indian stock market crashed from the high of 20000 to a low of around 8000 points. Corporate performance of most of the companies remained subdued, and the impact of moderation in demand was visible in the substantial deceleration during the current fiscal year. Corporate profitability also exhibited negative growth in the last three successive quarters of the year. Indian stock market has tumbled down mainly because of 'the substitution effect' of:
1) Drying up of overseas financing for Indian banks and Indian corporate;
2) Constraints in raising funds in a bearish domestic capital market; and
3) Decline in the internal accruals of the corporate.
II. Forex Market (example India)
In Emerging Economy like India, the current economic crisis was largely insulated by the reversal of
1) Foreign institutional investment (FII),
2) External commercial borrowings (ECB) and
3) Trade credit
Its spillovers became visible in September-October 2008 with overseas investors pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs. 40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009, reflecting at 21.2 per cent depreciation during the fiscal 2008-09. The annual average exchange rate during 2008-09 worked out to Rs. 45.99 per US dollar compared to Rs. 40.26 per USD in 2007-08 which is the biggest annual loss for the rupee since 1991 crisis.
Moreover, there is reduction in the capital account receipts in 2008-09 with total net capital flows falling from USD 17.3 billion in April-June 2007 to USD 13.2 billion in April-June 2008. Hence, sharp fluctuation in the overnight forex rates and the depreciation of the rupee reflects the combined impact of the global credit crunch and the de-leveraging process underway in Indian forex market.
III. Money Market
The money market consists of credit market, debt market and government securities market. All these markets are in some or other way related to the soundness of banking system as they are regulated by Central Bank. Emerging economy financial system is essentially sound and resilient, and that systemic stability is by and large robust and there are no significant vulnerabilities in the banking system. Yet, NPAs of banks may indeed rise due to slowdown but that rise is not likely to pose any systemic risks, as it might in many advanced countries.
IV. Slowing GDP Growth rate
In the past 5 years, the emerging economy has grown at an average rate of 7-8 per cent. Services which contribute more than half of GDP have grown fastest along with manufacturing which has also done well. But this impressive run of GDP ended in the first quarter of 2008 and is gradually reduced.
The economy and the stock market are closely related as the buoyancy of the economy gets reflected in the stock market. Due to the impact of global economic recession, Indian stock market crashed from the high of 20000 to a low of around 8000 points. Corporate performance of most of the companies remained subdued, and the impact of moderation in demand was visible in the substantial deceleration during the current fiscal year. Corporate profitability also exhibited negative growth in the last three successive quarters of the year. Indian stock market has tumbled down mainly because of 'the substitution effect' of:
1) Drying up of overseas financing for Indian banks and Indian corporate;
2) Constraints in raising funds in a bearish domestic capital market; and
3) Decline in the internal accruals of the corporate.
II. Forex Market (example India)
In Emerging Economy like India, the current economic crisis was largely insulated by the reversal of
1) Foreign institutional investment (FII),
2) External commercial borrowings (ECB) and
3) Trade credit
Its spillovers became visible in September-October 2008 with overseas investors pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs. 40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009, reflecting at 21.2 per cent depreciation during the fiscal 2008-09. The annual average exchange rate during 2008-09 worked out to Rs. 45.99 per US dollar compared to Rs. 40.26 per USD in 2007-08 which is the biggest annual loss for the rupee since 1991 crisis.
Moreover, there is reduction in the capital account receipts in 2008-09 with total net capital flows falling from USD 17.3 billion in April-June 2007 to USD 13.2 billion in April-June 2008. Hence, sharp fluctuation in the overnight forex rates and the depreciation of the rupee reflects the combined impact of the global credit crunch and the de-leveraging process underway in Indian forex market.
III. Money Market
The money market consists of credit market, debt market and government securities market. All these markets are in some or other way related to the soundness of banking system as they are regulated by Central Bank. Emerging economy financial system is essentially sound and resilient, and that systemic stability is by and large robust and there are no significant vulnerabilities in the banking system. Yet, NPAs of banks may indeed rise due to slowdown but that rise is not likely to pose any systemic risks, as it might in many advanced countries.
IV. Slowing GDP Growth rate
In the past 5 years, the emerging economy has grown at an average rate of 7-8 per cent. Services which contribute more than half of GDP have grown fastest along with manufacturing which has also done well. But this impressive run of GDP ended in the first quarter of 2008 and is gradually reduced.
The slowdown in growth of GDP is more clearly visible from the growth rates over successive quarters of 2008-09. In the first two quarters of 2008-09, the growth in GDP was 7.8 and 7.7 respectively which fell to 5.8 per cent in the third and fourth quarters of 2008-09. The third quarter witnessed a sharp fall in the growth of manufacturing, construction, restaurants. The last quarter was an added deterioration in manufacturing due to the deepening impact of the global crisis and a slowdown in domestic demand.
V. Reduction In Import-Export
During 2008-09, the growth in exports was robust till August 2008. However, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year.
V. Reduction In Import-Export
During 2008-09, the growth in exports was robust till August 2008. However, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year.
VI. Reduction In Employment
Employment is worst affected during any financial crisis. So is true with the current global meltdown. This recession has adversely affected the service industry of India mainly the BPO, KPO, IT companies etc.
Employment is worst affected during any financial crisis. So is true with the current global meltdown. This recession has adversely affected the service industry of India mainly the BPO, KPO, IT companies etc.
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