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The Sinking
ByNeha KalraSchool of Management StudiesAIMTC, JAl
A snapshot of the World Economy
• The United States of America experienced a major shake-out, technically known as recession in the year 2008.
• The financial crisis was linked to reckless and unsustainable lending practices resulting from the deregulation and securitization of real estate mortgages in the United States.
• The rise in the quantity of bad debt lead to a liquidity crunch.
• Significant decline in economic activity, 81 public corporations file for bankruptcy in the United States
• Resulted in the collapse of major financial institutions like Lehman Brothers, Merrill Lynch, Bank of America, etc.
Survival of the fittest: India
• It was indeed the survival of the fittest, the Indian economy emerged out as a real hero with only minor bruises.
• Despite an unprecedented global recession, India remained the second fastest growing economy in the world.
• No recession for India• India’s GDP grew by more than 6% throughout
this period• Further, India also made a successful recovery
from 2009-11.
THE PLIGHT OF THE THE PLIGHT OF THE INDIAN ECONOMY : INDIAN ECONOMY :
2011-122011-12
• Phase: Slowdown• Indicators: GDP-6.5% as against predicted 7.6%
Issue of major concern:
Depreciating Rupee
Depreciation or Devaluation??
Revaluation of Currency
Devaluation of Currency
Currency Apprec iation Currency Deprec iation
What is depreciation?• Currency depreciation refers to a fall in value of one currency
with respect to another.
• More and more rupees are sold and dollars are brought-
Rupee Depreciation
So, if 1-1-2012---1 Re. = 2 Sri Lankan rupees
1-6-2012---1 Re = 1.5 Sri Lankan rupees
INR would have depreciated by 25 per cent.
Again if, today 1$ = 45 Rs.
tomorrow 1$ = 60 Rs.
INR would have depreciated by 33 per cent.
Factors that pushed INR into the well !!
Eurozone Crisis
EURO to ZERO
• Birth of Euro-January 1, 1999.
• Member nations- 16 countries and 27 members
• EU comprised of strong (Germany, France) as well as weak (Greece, Portugal) economies.
• Culprits- PIIGS economies (Portugal, Italy, Ireland, Greece, and Spain.
Permissible LimitGermany- Agreed!
Each Country should not borrow more
than 60% of its GDP
Greece-It`s just a
norm, right?
Extent of the Crisis: Debt as a % of GDP
European Stability Mechanism- Mockery
Implications for India
• Dent in the India’s merchandise trade, since the EU has been one of India's important export destinations. India makes nearly 30% of its exports to Europe.• Default concerns of European nations has resulted in loss of confidence in the Euro and appreciation of dollar.
Strengthening of Dollar
Reasons:• Sovereign debt woes of EU• The dollar accounts for 40% of global trade.
The demand for US dollar comes from individuals and institutions that require American currency to enter into a transaction.
• Individuals travelling abroad carry foreign currency to transact abroad.
• Foreign Direct Investments (FDI)• Foreign Institutional Investors (FII)• Importers
Withdrawl Of Foreign
Investments
How Does Rupee Fall Affect Stock Markets ?????
Assume a Foreign Investor Having $10,000 Comes to
Invest in Indian Stock Markets!
Now He has to Convert his $ to Rs to invest in Indian
Stock Markets!
How Does Rupee Fall Affect Stock Markets ?????
On 1-1-2011, 1$ = Rs.50
He Converts $10,000 to Rs.1$ = Rs.50Therefore,
10,000$ = Rs.5,00,000
How Does Rupee Fall Affect Stock Markets ?????
He Decides to Buy Shares of L&T which was trading at
Rs.1,000/-
For Rs.5,00,000/- he can Buy 500 Shares of L&T.
(5,00,000/1000)
How Does Rupee Fall Affect Stock Markets ?????
On 22-5-2012, Assume L&T is trading at Rs.1050/-
He is happy as his shares have gone up from
Rs.1,000/- to Rs.1,050/-
How Does Rupee Fall Affect Stock Markets ?????
He Sells as his 500 Shares of L&T at Rs.1,050 and
gets 500 x 1050 = Rs.5,25,000/-
Now he Reconverts his Rs to $
On 22-5-2012, 1$ = Rs.55.39/-
How Does Rupee Fall Affect Stock Markets ?????
He Converts Rs.5,25,000 to $.
1$ = Rs.55.39Therefore,
Rs.5,25,000 = $.9,478.24(5,25,000/55.39)
10,000$ Now worth only 9,478.24$
How Does Rupee Fall Affect Stock Markets ?????
LOSS OF 521.76$
How Does Rupee Fall Affect Stock Markets ?????
Imagine if Share prices
have also come down from
Rs.1,000/- To Rs.900/- ?????
How Does Rupee Fall Affect Stock Markets ?????
Then 500 Shares x 900Rs/Share
= Rs.4,50,000/-
Reconvert Rs to $4,50,000/55.39
= $8,124.21
LOSS = $1,875.79Loss of 18.76%
How Does Rupee Fall Affect Stock Markets ?????
Fire in the Mountain RUN RUN RUN
Yawning Trade Deficit
• Value of imports > Value of exports
EXPORTS 304
IMPORTS 489
IMPORTS 370
EXPORTS 251
IMPORTS 288
EXPORTS 179
DEFICIT 2011-2012 2010-2011 2009-2010 185 119 109
India’s major Imports
Oil Price Rupee Exchange Rate
Cost Price Per Barrel Oil
Manipulation?
• Because Indian Rupee is weak, government has to providesubsidy to Oil Companies – Total oil Subsidy Bill = Rs. 1,50,000 crore• This is money collected from honest taxpayers.
National Poverty-Imposing poverty on an already poor
country
An interesting fact
Persistent Inflation
• The RBI records the level of inflation in india Wholesale Price Index
• Consumer Price Index
Policy Paralysis
Key policy reforms like • Direct Tax Code (DTC) • Goods and Service Tax (GST) have been in the pipe line for years.
• A retrospective tax law (GAAR) has already earned a lot of flak from the business community.
• The government announced FDI in retail but had to hold back amidst huge furore from both opposition and allies.
This has further made investors sentiment negative over the Indian economy.
Measures taken by Govt.
REDUCTION IN FOREIGN EXCHANGE RESERVES Fall in Foreign Exchange Reserves
• External Commercial Borrowings limit has been lifted to $40 bn from $30 bn earlier.
• The limit on foreign institutional investment in government securities in India has been enhanced by $5 bn.
• The RBI has decided to widen the non-resident investor base in government securities with a limit of $20 bn.
BEARING THE BRUNT
• Costlier Imported items• Foreign travel• Education Abroad
WHO WILL BENEFIT ??• Remittances
• Foreign tourists
Is India the only loser??
Future of Indian Rupee. . . ???
THANK YOU!!