GENESIS OF GLOBAL FINANCIAL CRISIS

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BOI SHAREHOLDING LTD.

• Manages Clearing House of Bombay Stock Exchange
  
• (BSE) since 1989.
• A joint venture between Bank of India BSE.
• Board consists 8 members 4 each from BOI
  BSE,
• Chairman Managing Director of BOI is
  Chairman of
• the Company.
• Functions
• Clearing Settlement
• Collateral Management for the Exchange.
• Depository Services under CDSL NSDL
  Depository.
• Franking Collection of stamp Duty in the State
  of
• Maharashtra.

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GENESIS OF GLOBAL FINANCIAL CRISIS
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• Monetary Policy in the US and other Western
  Countries were eased aggressively after dot com
  bubble.
• Policy rates in the US reached 1 in June 2003.
• The monetary excess during 2002-06 leading to
  Housing Boom.
• Assets prices recorded strong gains. Demand
  constantly exceeded domestic output.
• This mirrored in large growing Current Account
  deficit over the period.

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• China/East Asian Countries exporting to USA at
  low cost leading to growing surplus.
• Creations of huge Forex Reserves at EMEs.
• The Forex Reserves deployed back in US
  Treasuries.
• This flood of dollar resulted in sharp rise in
  US spending.
• Large Global imbalance due to very low interest
  rate and accommodative monetary policy.
• Projected global growth in April 2008 at 3.8
  down to contract by 1.3.
• Major advance economies are in recession.
• Global trade volume to contract by 11

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COMPONENT OF CRISIS

• Crisis roots in USA.
• Sustain rise in Asset prices, lax lending
  standards in 2002-06.
• Low credit quality.
• Originate Distribute model. Strong growth in
  complex credit derivatives.
• Predominately Sub-Prime mortgages sold to
  financial investors.
• Inflation in USA started to rise in 2004 so
  rise in interest rate.
• Housing prices depressed. With low/negligible
  margin prime-borrower encouraged to default.

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• US regulatory failure, multiplicity of
  regulators, well over 100 at the federal and
  state level.
• Role of rating agencies.
• Default by such borrowing led to losses by
  financial institution.
• Wiping of significant portion of capital of
  Banks.
• Mounted losses and dwindling net worth led to
  breakdown of trust among banks.
• Inter-bank money market nearly frozen.
• Failure of Lehman Brothers in September 2008.
• Complete loss of confidence.
• Deep and lingering crisis in global financial
  market.

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Implications for Emerging Market Economy

• Beginning 2003 low interest regime in USA, flight
  of capital to EMEs.
• Average flow of USD 285 Billion during
  2003-2007.
• Peak of USD 617 Billing in 2007.
• Estimated outflow of USD 190 billion in 2008-09.
• Portfolio and private flows were volatile.
• Substantial accumulation of large forex reserves
  with EMEs.
• Constant volatility in capital flows impinges on
  Exchange rate movements.

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• Excess Foreign Exchange reserves necessitates
  sterilisation and more active monetary policy.
• Excess capital flows results boom in Capital
  Market and high domestic credit and other assets
  prices.
• Abrupt reversal in capital flows leads to
  significant difficulties in economy.
• In current financial crisis reversal of capital
  flow are quick, leading to contraction of Bank
  Credit and collapsed stock prices.
• This further leads to banking and currency
  crisis, employment and output losses.

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IMPACT ON INDIA

• A . Impact of sub-prime crisis.
• As initial impact of sub prime crisis,
  followed by cuts in US fed fund rates, resulted
  in massive jump in net capital in flow.
• RBI sterlize liquidity by increase in cash
  reserve rates and through market Stablisation
  scheme (MSS)
• Policy rates were also raised
• India has limited exposure on complex
  derivations.
• Lower presence of foreign banks also minimised
  direct impact.

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• B. Fiscal Impact
• Govt. did higher expenditure on account of higher
  crude price, subsidies, debt waiver scheme in
  2008-09.
• Fiscal deficit doubled from 2.7 of GDP in
  2007-08 to 6 in 2008-09.
• Net Market borrowing trebled from Rs. 130 billion
  to Rs. 329.65 billion.
• Standard is Poor downgraded its outlook on long
  term sovereign rating from stable to negative

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• C. Impact on Real Economy
• Slowdown in external demand, reversal of capital
  flow, growth in Industrial production decelerated
  to 2.8 in 2008-09 from 8 previous year.
• Service sector remained largely in effected with
  growth of 9.7 in 2008-09 as against 10.5 in
  previous year.
• Real GDP growth slowed down to 6.7 in 2008-09 as
  against 9.
• Rupee dollar rate under pressure. Rupee
  depreciated.
• Slowdown in Exports.
• Reduced credit take off.

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• Impact on Capital Market

Index Movement in last one year
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Impact on Exchange Rates
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Impact on yield on 10 years Government Bond
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ACTION BY CENTRAL BANK

• Cash Reserve Ratio brought down to 5 in January
  2009 from 9 (September 2008) injecting Rs. 1600
  billion is primary liquidity.
• Statutory liquidity ratios brought down, opening
  of refinance windows, refines to SIDBI and EXIM
  banks
• Repo and Reverse Repo rates are cut down from 9
  to 4.75 and 6 to 3.25 respectively.
• MSS operations were reversed Balance Rs. 860
  billion end March 2009 against Rs. 1754 billion
  at May 2007.

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• Various monitory and liquid measures released
  liquidity of Rs. 4900 Billion since mid September
  2008 (about 9 GDP)
• Banks were advised to step up lending to core
  sectors.
• Banks were advised to bring down BPLR.
• Restriction on interest rate to bulk deposits.
• Restrictions loosened on External commercial
  borrowing by corporates.

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STRENGTH OF INDIAN FINANCIAL SECTOR

• Full but gradual opening of current account.
• Foreign investment flows are encouraged.
• External commercial borrowing is subject to
  ceiling and end use restrictions.
• Macro ceiling stipulated on portfolio investment
  in Govt. Securities and Corporate Bonds by FIIs.
• Imposition of prudential limits on Banks, such as
  inter-bank liabilities, borrowing and lending,
  money market, assets - liability Management for
  both on and off balance sheet terms.

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• Implementation of Based II . Minimum 9 CRAR.
• CRAR of all scheduled commercial banks at 13 at
  end March 2008.
• Single factor stress tests reveal that Banks can
  withstand shocks on account of change in credit
  quality, interest rates and liquidity conditions.
• Strict prudential norms towards income
  recognition, Asset classifications and provisions
  by the Banks.

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WHY THE INDIAN FINANCIAL SECTOR WEATHERED THE
STORM

• Negligible direct exposure to toxic assets which
  contaminated Western Banking System.
• Banks credit quality remained high.
• Credit Growth apx. 30 during 2004-07.
• RBI tightened prudential norms CRR at 13 at
  March 2008 end against regulatory requirement of
  9.
• Net NPA at 1 of net advance and 0.6 of assets.

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LESSONS

• Central Bank should adopt a broader
  macro-prudential views of asset price movements,
  credit boom and the build up of systematic risk.
• Asset price bubble leads to strong credit growth
  such as real estate and stock market.
• Only substantial hike in policy rates can pick
  the bubble.
• Pre-emptive action like hike in risk weights and
  provision norms for Banks.

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• Sharper focus on liquidity risk management, risk
  transmission.
• Global imbalances are to be reduced to a
  manageable proportion.
• US needs to save more export more.
• Asian Countries have to consume more, export
  less.

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STABILITY BEYOND EXPECTATIONS. INDIA
GENERAL ELECTION MAY
2009.
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• PRE-POLL CRITICAL ISSUES

• Global Financial crisis.
• Rajor-thin majority Government.
• Melt down in Capital Market. Sensex touching a
  low of 8160 in April 2009, down from a peak
  of 20728, a fall of 61.
• Weakening economy. Rising job losses in export
  sector.
• General Election in May 2009. Political
  Uncertainty
• Formation of 4 front UPA led by Congress, NDA
  led by BJP, Third Front led by Left Parties.
• No coalition likely to get majority

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• INDIAN ELECTIONS 2009
• India, worlds 7th largest Country. Area 3.2
  million sq.km.
• Population more than 10.1 billion.
• Religion Hindu 80.5, Muslim 13.4 (3rd
  largest)
• Estimated voters 714 million.
• Election duration 1 months in 5 phases 16
  April to 13th May 2009.
• Number of polling stations 687402
• Number of Seats 543
• National parties 9
• Regional parties 24

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• PRE POLL MARKET SENTIMENTS
• Either UPA or NDA form the Government. Both are
  seen market friendly.
• Market on upward swings since chances of Left
  Parties (3rd Front) were remote.
• Market may show higher volatility if there is a
  fractured verdict.
• Sensex rises 300 points on the eve of election.

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POST POLL MARKET SENTIMENTS

• Major News Paper Headlines / Views
• Finally a free hand
• Decisive vote for growth.
• The Indian economy is set to maintain its growth.
• Stable Government to put the confidence laid to
  all time high.
• A strong Government, influence of the Left
  Parties disappeared.
• With clear mandate there is a certainty in terms
  of policies.

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• The Congress will have the last word in issues of
  Government .
• Smooth transition of Government.
• Economy will be the main priority of the
  Government.
• Congress is a pre reform party.
• The Congress will unlock long awaited reforms.

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STABILITY - KEY AGENTS

• Strong United Progressive Alliance (UPA) led
  government allows continuity in policies.
• Smooth transition this is more like an
  extension of UPAs term. IN the event of any
  other party / alliance coming to power, it would
  have taken some time for the new government to
  formulate its policies.
• UPA to continue with its policies with more power
  in hand now, no fear of strange coalitions or
  drag of the communist parties anymore.
• Economic reforms may speed up. FDI inflows into
  the country over the next 6-12 months can improve
  as India gets to play a larger role in G20.

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• Government is likely to continue to boost credit
  to support growth.
• Rural focus and reforms to speed up.
• Disinvestments Pressure on fiscal position will
  push the government for disinvestments, though
  moves are unlikely to be very aggressive.
• Infrastructure Focus on low-cost housing and
  power generation.
• Focus on rural populace Improve access to rural
  credit at lower interest rates
• Subsidise food for poor implementation of NREGA
  develop rural infrastructure.
• Marching of reforms in financial sector in
  particular banking and insurance.

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ACTION AT DALAL STREET

• May 15, 2009 - Previous Day Sensex at 12173.
• May 18, 2009 -Market opened at 9.55 A.M. at 15
  high
• Circuit Breaker applied. Trading halted to 1
  hour.
• Market re-opened at 11.55 A.M. at 20 high.
• Circuit Breaker applied. Market Closed for the
  day.
• Sensex closed at 14284.

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• Market Wide circuit Breaker in the
• Indian Stock Market

• There Were five days in which Circuit breaker had
  been applied by the exchanges in the history.
• The upper circuit filter was placed only once
  i.e on 18th may 2009.

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THANK YOU