The Global Financial Crisis 5th anniversary: All you ever wanted to know

Oct 25 2013, 16:34 IST
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The meltdown originated in the sub-prime mortgage crisis in USA in 2007. The meltdown originated in the sub-prime mortgage crisis in USA in 2007.
SummaryYears that preceded turbulence saw an exceptionally strong performance of the world economy.


* Impact of the Economic Crisis on India

With the increasing integration of the Indian economy and its financial markets with rest of the world, there were downside risks from these international developments. These included:

- Capital Outflow

The main impact of the global financial turmoil in India has emanated from the significant change experienced in the capital account in 2008-09, relative to the previous year. Total net capital flows fell from US$17.3 billion in April-June 2007 to US$13.2 billion in April-June 2008.

-Impact on Stock and Forex Market

With the volatility in portfolio flows having been large during 2007 and 2008, the impact of global financial turmoil was been felt particularly in the equity market. Indian stock prices were severely affected by foreign institutional investors' (FIIs') withdrawals. FIIs had invested over Rs 10,00,000 crore between January 2006 and January 2008, driving the Sensex 20,000 over the period. But from January, 2008 to January, 2009 this year, FIIs pulled out from the equity market partly as a flight to safety and partly to meet their redemption obligations at home. These withdrawals drove the Sensex down from over 20,000 to less than 9,000 in a year.

- Impact on the Indian Banking System

One of the key features of the current financial turmoil had been the lack of perceived contagion being felt by banking systems in emerging economies, particularly in Asia. The Indian banking system also had not experienced any contagion, similar to its peers in the rest of Asia. The Indian banking system was not directly exposed to the sub-prime mortgage assets. It had very limited indirect exposure to the US mortgage market, or to the failed institutions or stressed assets.

A detailed study undertaken by the RBI in September 2007 on the impact of the sub-prime episode on the Indian banks had revealed that none of the Indian banks or the foreign banks, with whom the discussions had been held, had any direct exposure to the sub-prime markets in the USA or other markets.

However, a few Indian banks had invested in the collateralised debt obligations.

(CDOs)/ bonds which had a few underlying entities with sub-prime exposures.

(Source:Rajya Sabha Secretariat, RBI, SEBI data)

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