There are three major crisis faced by the Indian financial markets since the opening up of the Indian Economy in 1992:
Crisis
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Reason
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India’s response
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South-East Asian
currency crisis in 1997
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EMEs were over-heated with the foreign funds entering their real
estate and stock markets.
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India’s premature
stage of openness (of economy) helped the country from a wild attack of
withdrawal of foreign funds as witnessed in other countries
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Global financial
crisis in 2007
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Sub-prime loan crisis à
Fall of investment bank, Lehman Brothers
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Country’s economy was
well protected by the RBI
The proactive
regulatory regime perceived by higher capital as well as higher risk
weightage for real estate loans, the central bank was able to kept the asset
bubbles at bay.
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Slump in the Chinese
economy witnessed in August 2015
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Devaluation of Yuan by
People’s Bank of China (PBoC) in August 2015 led to major volatility in
global markets and competitive devaluation in currencies by a few emerging
markets
Trade data released earlier this
month showed China’s exports fell 8.3 per cent in July. China has been the
world’s manufacturer for years now, and its growth has been dependent upon
exports. A decline in exports suggests a global softening in demand and fall in
consumption.
There is also concern that a
shrinkage of China’s manufacturing will impact other countries that are part
of the value chain of Chinese manufacturing. A dip in China’s growth and
global demand has led to the softening of commodity prices, and that, in
turn, has impacted other commodity exporting nations such as Russia and
Brazil.
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Currencies across the
world have been under stress over the last couple of weeks after China
decided to devalue the yuan. The rupee has depreciated around 2.8 per cent
over the last 10 days.
We were able to
protect our markets because of our strong macro economic fundamentals
There is also a view
that a fall in the rupee has been more than covered by the fall in crude oil
and other commodity prices — since India is a big commodity importer.
For Indian markets, as
inflation has been climbing down, monsoon near normal and currency being one
of the better currencies compared to Malaysian Ringgit, Indonesian Rupiah and
South African Rand, the economy could withstand any financial onslaught.
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The Sensex fall
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Related to the China’s
slowdown (the point above) - While China announced a depreciation of its
currency, the yuan, twice last week in order to prop up exports and keep its
factories going, the move rang alarm bells across the world, leading to a
slide in many global currencies, and a fall in their stock markets.
Renewed concerns over
Greece where, not too long after a debt default and signing of a new deal to
stay in the Eurozone
Then there are
apprehensions of an expected rate hike by the US Federal Reserve in
September, which may lead to greater funds outflows from emerging economies
Experts say that since
several commodity driven emerging economies including China are under extreme
pressure, FIIs are finding it tough to liquidate their money there — and are,
therefore, looking to sell in the Indian markets in order to meet their
obligations abroad. “You will sell what you can sell,”
A sharp fall in the
markets also pushed short-sellers to take fresh positions, pushing the market
further into the red à most of the money is headed into US
treasury bills
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The Shanghai Composite in China and Hang Seng in Hong Kong have
fallen 19 per cent and 11.4 per cent since August 14. The Dow Jones
Industrial in the US fell 3.1 per cent on Monday, taking its loss to 8.4 per
cent. All the major European indices in the UK, Germany and France have
fallen more than 10 per cent since August 14.
In comparison, Indian markets lost only 2.5 per cent last week, and
were holding on even as markets worldwide crashed. On Monday, however, the
Indian markets too gave in to pressures of the global sell-off, tanking as a
sharp outflow of foreign institutional money took place.
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The China factor:
- Even though on REER (Real Effective Exchange Rates) basis, Yuan doesn’t seem to be undervalued but the timing of devaluation (slowing growth in China and plunging stock market) exacerbated the market reaction as market participants took this as a signal that Chinese authority are going to use currency devaluation as a tool to spur growth
- For long China has been the powerhouse of global growth. So, naturally any slowdown in Chinese economy has much wider ramifications.
- On the one hand, it adversely impacts commodities producing nations like Australia, Africa, Russia etc. directly as the biggest consumer of commodities like iron ore and copper, slows down.
- On the other hand, it impacts most of the nations, including the U.S. and Eurozone, exporting to China.
- The sharpest fall in China’s stocks since 2007 came despite Beijing’s latest attempt to support the equity market
- In the background of the current turmoil lies the unusual rise in Chinese markets for about a year until June, as investors — most of them ordinary Chinese — poured large sums of money into stocks, even though both growth and corporate profits were weak. The detachment from the reality of China’s slowing economy led to overvaluation of the market, and the creation of a classic bubble, which finally burst on June 12. Small retail investors have been the worst hit by the crash. Many had borrowed to invest in the market, and some were reported to have even sold homes to join what they believed was a party that would quickly make them rich
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