towards 10th issue

8/14/2019 Towards 10th Issue

1/19

IA FACING

UIDITY CRUNCH

An effort by Stockyard in association with Mantra Consultancy Group

16th November,2008 Issue

ATA SAYS TATA TO

SINGUR

RE, HERE AND NOW

ERE? A PEEP INSIDE

CRISIS ENVELOPE


2/19

t o w a r d s

. .

t h e p e o p

l e

F ROM E DITOR S DESK

W e are glad to present to you the tenth issue of our fortnightly pub-lished magazine towards.This magazine is fundamentally based on the core issue o

market and its impact on the society and vice versa. In this issue we have covered many

of the macroeconomic topics and also the Subprime crisis from its very root. The main

focus of the magazine is to acquaint you people to all the possible knowledge and analy-

sis done by the members of this team and present you the picture in a very refined man-

ner. In the coming days of the SIP interviews and the placement interviews I think this

magazine can prove to be of great help to all of us. In the current issue, the part of liquid-

ity crunch has been given a new touch of analysis. The hot topic of TATA Nano has been

included so as to make you all know the inner intricacies of the case and decide whether

there is an opportunity loss for the West Bengal government or it is really going to give

some benefit to them in the upcoming elections. The market analysis part focuses on the

market statistics for the past two weeks. We as a team welcome your response and partici-

pation for writing articles. Kindly support this attempt to address your own needs in a

better way and suggest for improvements. I hope you enjoy this journey towards a better

placement and a better SIP.

Wish you all good luck.

Wish you all good reading.

Editor


3/19

VOLUME 1, ISSUE 1

Subprime Crisis two words that ring a bell around the world, more often than not for its stroconnotation with the present financial situation prevailing globally. Even a nine year old girl finds familiarity with the word, not because she understands it technically, but because she has probably heard her fathe

or mother use it often over dinner pondering upon the declining values of their small investments made ishares and funds.

It is indeed a crisis; a critical situation, persistent everywhere now, and transcending all the sumountable boundaries possible. In this article, we start by briefing about the Subprime Crisis, go on to itimpact on various economies around the world; with the main focus on its impact in India.

Origin of the crisisBeginning in summer of 2006, the over building of

the houses in the US, especially during the boom period

of housing market, eventually led to an excess of inven-tory of homes, causing the prices of the houses to de-cline. An increase in loan incentives such as easy initialterms, and a long-term trend of rising housing prices hadencouraged borrowers to assume difficult mortgages inthe belief they would be able to quickly refinance atmore favorable terms. However, once housing pricesstarted depreciating moderately in many parts of theU.S. and interest rates began to rise at the same time,

homeowners were unable to re-finance and began to default on loans as their loans reset to higher interesrates and payment amounts. An estimated 8.8 million homeowners nearly 10.8% of total homeo

had zero or negative equity as of March 2008, meaning their homes are worth less than their mortgageWith the advent of securitization, the credit risk got transferred or distributed to the investors througMortgage-Backed Securities (MBS). According to the figures, the mortgaged-backed securities increasefrom 54% in 2001 to 75% in 2006.

It is believed that the securitization of home loans for people with poor credit is one of the main reasons for the present credit turmoil. Freddie Mac and Fannie Mae bought mortgages from lending institutions and then either held them in investment portfolios or resold them as mortgage-backed securities tinvestors. The two companies played a vital role in providing financing for the housing markets. But according to the reports published in the New York Times back in September, 1999, it was stated that FanniMae Corporation was easing the credit requirements on loans thus encouraging banks to extend hommortgages to individuals with low or moderate incomes whose credit is generally poor. On one side if faced pressure from the Clinton Administration to expand mortgage loans, on the other side, it felt the pressure from stock holders to maintain its phenomenal growth in profits. It is also believed that the credit rating agencies provided investment-grade rating to the securitization transactions (CDOs and MBSs) baseon subprime mortgages. High credit ratings encouraged the flow of investor funds into these securities,

THERE, HERE AND NOW WHERE? A PEEP INSIDE THCRISIS ENVELOPE

t o w a r d s

. .

t h e p e o p

l e


4/19

VOLUME 1, ISSUE 1

helping finance the housing boom. But when the ratings were lowered from Quarter3, 2007 to Quarter22008, it put pressure on the financial institutions to lower the value of their MBS.

Impact and downturns in financial marketsThe economy started to feel the crisis in February 2007

with the gradual but continuous slowdown of the financial market.This led to a domino effect in the markets all around the world. Thedomino effect is a chain reaction that occurs when a small changecauses a similar change nearby, which then will cause another similar change. Financial institutions from around the world have recognizedsubprime-related losses and write-downs exceeding US $501 billion asof August 2008. The financial sector began to feel the consequences of this crisis in February 2007 with the $10.5 billion write-down of HSBC, which was the first major CDO (Collateralized Debt Obliga-tion) or MBS related loss to be reported. During 2007, at least 100mortgage companies either shut down, suspended operations or were sold. Top management has not ecaped unscathed, as the CEOs of Merrill Lynch and Citigroup were forced to resign within a week of eacother.

Stock indices worldwide trended downward for several months since the first panic in July 2007.The crisis caused panic in financial markets and encouraged investors to take their money out of riskmortgage bonds and shaky equities and put it into commodities as "stores of value". Financial speculin commodity futures following the collapse of the financial derivatives markets has contributed to thworld food price crisis and oil price increases due to a "commodities super- cycle . Financial speculseeking quick returns have removed trillions of dollars from equities and mortgage bonds, some of whichas been invested into food and raw materials.

On 15 September 2008, a slew of financial concerns caused the indices to drop by their sharpeamounts since the 2001 terrorist attacks. That day, the most noteworthy trigger was the declared bankruptcy of investment bank Lehman Brothers. It was the largest casualty of the global credit crisis, given its assets at the time of filing, Lehman surpassed WorldCom as the biggest U.S. bankruptcy filing tildate. The investment banker had close to $639 billion in assets at the time of filing, while WorldCom hadabout $107 billion when it did the same in 2002. Additionally, Merrill Lynch was joined with Bank oAmerica in a forced merger worth $50 billion. Finally, concerns over insurer American InternaGroup' s (AIG) ability to stay capitalized caused that stock to drop over 60% that day. Poor economic dat

on manufacturing contributed to the day's panic, but were eclipsed by the severe developments of the fnancial crisis. All of these events culminated into a stock selloff that was experienced worldwide.

Bailout package The much anticipated passage of the $700 billion bailout plan was struck down by the Hou

Representatives in a 228 205 vote on September 29. In the context of recent history, the result was cattrophic for stocks. The Dow Jones Industrial Average suffered a severe 777 point loss (7.0%), its wors

point loss on record up to that date. The NASDAQ tumbled 9.1% and the S&P 500 fell 8.8%, both which the worst losses were those indices experienced since the 1987 stock market crash.

t o w a r d s

. .

t h e p e o p

l e
http://en.wikipedia.org/wiki/HSBChttp://en.wikipedia.org/wiki/Mortgagehttp://en.wikipedia.org/wiki/Commoditieshttp://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_price_crisishttp://en.wikipedia.org/wiki/Oil_price_increases_since_2003http://en.wikipedia.org/wiki/Lehman_Brothershttp://en.wikipedia.org/wiki/American_International_Grouphttp://en.wikipedia.org/wiki/American_International_Grouphttp://en.wikipedia.org/wiki/Proposed_bailout_of_U.S._financial_system_(2008)http://en.wikipedia.org/wiki/Proposed_bailout_of_U.S._financial_system_(2008)http://en.wikipedia.org/wiki/American_International_Grouphttp://en.wikipedia.org/wiki/American_International_Grouphttp://en.wikipedia.org/wiki/Lehman_Brothershttp://en.wikipedia.org/wiki/Oil_price_increases_since_2003http://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_price_crisishttp://en.wikipedia.org/wiki/Oil_price_increases_since_2003http://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_price_crisishttp://en.wikipedia.org/wiki/Commoditieshttp://en.wikipedia.org/wiki/Mortgagehttp://en.wikipedia.org/wiki/HSBC


5/19

VOLUME 1, ISSUE 1

Despite congressional passage of historic bailout legislation, which was signed by President Bush on Oct4, Dow Jones Index tumbled further when markets resumed trading on Oct, 6. crisis it is expected that will take years for the United States to recover from such a mess. It is also estimated that even with th

passing of the so-called bailout package; many banks within the United States will tumble and thereforcease operating. It is estimated that over 100 banks in the United States will close their doors because othe financial crisis. This will have a severe impact on the economy and consumers. As a result of thPresident Bush also signed into law on 13 February, 2008 an economic stimulus package of $168 bmainly in the form of income tax rebates, to help stimulate economic growth. The economic stimulus package included the mailing of rebate checks to taxpayers. Such mailings started the week of 28 April 2008These mailings, however, coincided with unexpected all-time jumps in food and gasoline prices.

The U.S. federal government has made significant financial commitments through efforts to sup port the financial system. This includes pledges of up to $200 billion to protect Fannie Mae and FMac, an $85 billion bridge loan for AIG, and a $29 billion loan guarantee for Bear Stearns.

The subprime crisis had a series of other economic effects. Housing price declines left consumerwith less wealth, which placed downward pressure on consumption . The sudden lack of credit also ca slump in car sales. Ford sales in October 2008 were down 33.8% from a year ago, General Motorwere down 15.6%, and Toyota sales had declined 32.3%. One in five car dealerships are expected to clin fall of 2008.

One possible impact of US subprime crisis on global markets would be certain unforeseen loss pertaining to securities. If such a situation arises, it would further make credit conditions stringent. Consequently, loss incurred on securities would increase. As a cumulative effect, the financial markets wouls p i r a l d o w n w a r d c a u s i n g t h e m o n e t a r y p o l i c i e s t o b e c o m e l o o sWith regard to equity markets, it is being anticipated that equity markets may go down and the cost ocapital (effective) may rise by 200 basis points as compared to the baseline. As a result of the credit con

straints, business investment in the United States of America would drop, unemployment would rise anthere would be a prolonged phase of depression in the consumer prices.

Impact on Indian economyAlso this crisis could

hit developing economies thatexport a lot to the US. Around40% of Chinese exports, for ex-ample, go to the US. About

22%of Indian goods exports goto the US and a significantlylarger share of Indias serviceexports. However it was stated

by economists of the WorldBank that the Impact of US sub-

prime crisis on India and Chinamay not be very large. But theactual picture is something

t o w a r d s

. .

t h e p e o p

l e

Movement of Sensex and Nifty from Jan-Oct 2008
http://en.wikipedia.org/wiki/Economic_Stimulus_Act_of_2008http://en.wikipedia.org/wiki/Fannie_Maehttp://en.wikipedia.org/wiki/Freddie_Machttp://en.wikipedia.org/wiki/Freddie_Machttp://en.wikipedia.org/wiki/AIGhttp://en.wikipedia.org/wiki/Bear_Stearnshttp://en.wikipedia.org/wiki/Fordhttp://en.wikipedia.org/wiki/General_Motorshttp://en.wikipedia.org/wiki/Toyotahttp://en.wikipedia.org/wiki/Toyotahttp://en.wikipedia.org/wiki/General_Motorshttp://en.wikipedia.org/wiki/Fordhttp://en.wikipedia.org/wiki/Freddie_Machttp://en.wikipedia.org/wiki/Bear_Stearnshttp://en.wikipedia.org/wiki/AIGhttp://en.wikipedia.org/wiki/Freddie_Machttp://en.wikipedia.org/wiki/Freddie_Machttp://en.wikipedia.org/wiki/Fannie_Maehttp://en.wikipedia.org/wiki/Economic_Stimulus_Act_of_2008


6/19

VOLUME 1, ISSUE 1

different because this crisis has propelled both the economies on a slowing node. In last fiscal (2007-08India and China have shown economic growth by 8.9% and 11.9% respectively but this time these are estimated at 7.7% and 10.1% respectively. Also in last 9 months, stock market in India has plunged by morthan 50%. FIIs have pulled out $11.09 billion in 2008 as Indian markets joined the global meltdowtriggered by the subprime and credit crises. A major reason for the 50 per cent fall in the Sensex this yeais FII withdrawals .

Impact on IT sector If we look closely at some of the sectors in India which have been hit significantly by the glob

crisis, then the IT sector , one of Indias largest export -earners, is almost certain to be affected. The induearns more than 60% of its revenue from the US and the recent wave of closures and mergers will meathe sprucing of many software-related services. A worse downward revision is expected this quarter awell, though some larger players like TCS and Satyam have officially denied any possible impact ogrowth. As we know, for the software services companies in India, 85-90% billing is done in US dollarsTherefore, the recent rupee depreciation will have a positive impact on their earnings, and in turn prov

positive for the sector as a whole. In fact, according to reports that came in on 9 July, 2008 by outsourcingindustrys top body - National Association of Software and Services Companies (NASSCOM) - Indisoftware exports grew 29% in the financial year just ended despite global economic turmoil. But looking athe flip side, firms like Infosys might lose some revenue owing to the fact that they obtain 28% of revenuefrom the Euro, British Pound and Australian Dollar and the US Dollar has been appreciating against thescurrencies. So, when these earnings are translated into US Dollars, they will have a negative 2% impact othe companys earnings. So, the currency depreciation need not necessarily paint a rosy picture for the ITsector.

Impact on Banking sector As a consequence of the global events, banking industry in India has also affected. The India

banks find it difficult to raise funds from abroad for their overseas operations and now have to rely on domestic borrowing. While ICICI Bank has lost as much as $264 million up until January due to its exposurin the overseas credit derivatives markets, other banks are also facing significant losses. Although th

banks borrowed money from RBI, it wasnt sufficient. The country's finance minister and the RBI gover-nor have repeatedly stepped in to cool the nerves, with comforting words, and immediate measures to easthe problems and forward-looking initiatives. The CRR has been decreased from 9% to 5.5%, Repo Ratfrom 9% to 7.5% and SLR from 25% to 24%. By these as well as some other measures, RBI has createliquidity in the market of worth 2,85,000Crore. RBI has used these tools to keep a tight control over thgeneral interest rates in the economy. With high inflation rate on one hand and the herculean task of maintaining growth in the economy on the other, the RBI is taking keen measures and will have to continue balancing the CRR and Repo Rates. One must add here though, that the decline in prices globally of metals i

particular and crude oil would both have a soothing effect on inflation during the year end quarter. Says recent release by CRISIL, The profit levels of the Indian Banks are likely to be impacted by mark market provisions on investment portfolios and considerably lower profit on sale of investments, as com

pared with previous years. To sum up, expect margins for banks to remain under pressure for some moretime now.

t o w a r d s

. .

t h e p e o p

l e


7/19

VOLUME 1, ISSUE 1

To a question asked by a worried investor about how the fall in the market affects his invesments, this is what the Telegraph had to say, A savings bank account gives you 3.5% interest means you are actually losing money when you factor in inflation. At the moment, the best bet is a banfixed deposit that yields just above 10 per cent. Gold looked like a good bet but it is turning volatile nowStocks and mutual funds are gutted in this turmoil so you wont lose sleep if you have not parked ymoney there. And, hopefully that applies to most of us as well.

Impact on Education sector Amidst all this tumult, education sector in India has also

affected drastically. One of the most confused is the set of studentswho are standing at the brink of their career starting-point, facing aharsh reality. Instead of hiring professionals, companies are seen ei-ther laying off hundreds of employees or cutting down on packages

being offered to fresh graduates. This definitely has become the hot-topic among the young graduates who, when started off with the re-

spective engineering or commerce courses expecting a high returnwhen they join the corporate world; whereas now, all that they havein hand are a few offer letters with much lower packages than be-fore. Also, the students with offer letters fear the long wait and have started to look out for alternativesThe most hit are the Engineering and Management schools, with MBAs being offered much lower packages than their averaged college salary. It definitely sets in a gloomy atmosphere, with the students tendingto change the entire career choice itself. But, career counselors look at the brighter side and ask the students to grab the best of out of the situation and learn from the crisis. They also maintain that India is noyet as adversely affected by the turmoil as other countries around the world.

It is not just the jobs that the sector is deprived of. Institutes like IITs and IIMs are wary of possible cut-back on the endowment funds because of the global economic slowdown. Funds rfrom alumni and companies are usually meant for specific projects. These funds pour in between Octobeand December every year. Current projects will not be affected despite the economic slowdown, but new

projects might take a hit, said T KGhosal, deputy registrar (finance), the Indian Institute of Technology,Kharagpur.

The Subprime Crisis: Cause, Effect and Consequences argues that three basic issues are at the rooof the problem, the first of which is an odious public policy partnership, spawned in Washington and com

prising hundreds of companies, associations and government agencies, to enhance the availability of afordable housing via the use of creative financing techniques. Second, federal regulators have actively encouraged the rapid growth of over-the-counter (OTC) derivatives and securities by all types of financiainstitutions. And third, also bearing blame for the subprime crisis is the related embrace by the Securitieand Exchange Commission (SEC) and the Financial Accounting Standards Board of fair value accountingAfter reviewing the Bush administration's proposed solutions as flawed, this article recommends a strategfor subprime crisis resolution. Job one is to rebuild market confidence in structured assets by going back tfirst principles on issues such as market transparency, standardization of contracts, and accounting treatment.

t o w a r d s

. .

t h e p e o p

l e


8/19

VOLUME 1, ISSUE 1

By reducing complexity on the trade of structured assets through simple deal structures and providing investors with the information they need to analyze collateral, for example by requiring SEC registration and public pricing of assets, much of the current liquidity problem is ameliorated.

Greenspan, the former Chairman of the Federal Reserve, stated: "The current credit crisis wcome to an end when the overhang of inventories of newly built homes is largely liquidated, and hom

price deflation comes to an end Very large losses will, no doubt, be taken as a consequence of the cri-sis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generallywill be able to get back to business."

Contributed by: Mukesh MangalRamya Pragya

t o w a r d s

. .

t h e p e o p

l e

INVESTMENT QUOTES

I never attempt to make money on the stock market. I buy on the assumption that theycould close the market the next day and not reopen it for five years.

W ARREN BUFFET

Rule No.1: Never lose money.

Rule No.2: Never forget rule No.1.

W ARREN BUFFET

The financial markets generally are unpredictable. So that one has to have different scenarios... The idea that you can actually predict what's going to happen contradicts my

way of looking at the market.

GEORGE SOROS

Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.

GEORGE SOROS


9/19


10/19

VOLUME 1, ISSUE 1

T he much talked about Re.1 lakh, the peoples car, made Singur a flashpoint and a hotspot for politics. The story began when CPI (M), the ruling party in the state had acquired 997.11 acres of land required for Nano. Cashing in on the situation, Mamta Banerjee, Trinamool Congress head started the agita

tion against the same, demanding more compensation for the farmers. It took a tragic turn when the policopened fire on the agitated people, killing 14 people and leaving many others injured. This agitation wathe centre of medias attraction for quite a while. Little could Budhhadeb Bhattacharjee do when Tatas de-cided to step out of Singur.

Just when CPM, the party ruling over West Bengal for more than 30 years was taking step away from its age old anti-industrialist policies towards industrialization and development, itwas stalled by Mamta Banerjee. She took advantage of the situationand the communist mentality of the people. CPM is reaping what ithad sown 30 years back. The Singur drama was the opportunityMiss Banerjee was looking for. She needed a platform to make it

big in Bengal and she got it in the form of Singur. The Nano projectis of national importance and would have changed the face of WestBengal and Singur forever. So, this should not have been made anissue for politics and election. Lok Sabha elections are scheduledfor May 2009. Miss Banerjee took advantage of some 15-16%farmers who did not sell their land they were mostly illiterates, ab-sentees or Trinmool congress workers. The farmers feared that gov-ernment will pay them prices below market prices. Mamta was right or wrong depends on the individua

perception. She can be perceived as savior by the farmers across India or a dirty politician by the urbaworking class. The picture will be clear only after 2009 Lok Sabha election .

The reasons that forced Tatas to pull out from Singur was its policy of squeaky clean publicimage. Tatas have always been very particular about their image. It took them decades to build upon thaHow could they afford to risk it now by the controversies involved with Singur? So they thought it wawiser to quit and find a place free of controversy. At the same time, they gave their concern for employ-ees safety as another reason to leave Singur.

Also, this article would be incomplete without discussion on the most important and infamous reson for relocation of Tata Nano, Miss Mamta Banerjee. Miss Banerjee is a lawyer by education anamongst those few people who could make to the coveted Lok Sabha in their 20s. She is known to be ag-gressive (read stubborn) to the extent of being violent at times. Once she clasped the collar of SamajwadMP Amar Singh in parliament.

It is in fact one of the most devastating turn of events in Singur. Business houses will nothink several times before putting a step forward in West Bengal. After all the turmoil, finally Nano has

TATA SAYS TATA TO SINGUR MISS BANERJEES LOSS, MR. MODIS GAIN

t o w a r d s

. .

t h e p e o p

l e


11/19


12/19

VOLUME 1, ISSUE 1

W hen Lehman brothers filed for bankruptcy un-der chapter 11 the world was shocked by the decision. Therumors came in that ICICI bank, the largest private sector

bank of India, has excess exposure in the bankrupt bank and will face severe problems in liquidity. Then we get adata from the RBI as follows:

Depositors pull out 17000crore from ICICI bank

We see that depositors pulled out in excess of 17Kcrore from the ICICI bank where as SBI received in excess of 52kcrores as deposits. This started the spark of the liquidity crisis in India which sprealike wild fire and a series of events kept the entire sector as well as money market on tenterhooks, banklacked trust in lending via call money markets thus the rates shot up overnight and the trouble began.

INDIA: FACING LIQUIDITY CRUNCH

Deposits (Rs cr) Rs. crBank 10 oct 2008 31 march 2008 Difference SBI 574643 522583 52060

ICICI 227384 244431 -17047

PNB 181000 166457 14543

HDFC 131750 100769 30981

Canara Bank 165600 154072 11528

Bank of India 136655 125520 11135

t o w a r d s

. .

t h e p e o p

l e

Change in %

Sept 26 , 2008 Oct 10, 2008 Oct 10 , 2007 Fortnight Year on year

Bank credit(Cr)

25,42,467 2607404 2019175 2.55% 29.13

Depos-its(Cr)

3442138 3469359 2858033 .79% 21.39

Credit/de posit

.7386 .7515 .7064 - -

MACRO ECONOMY


13/19

VOLUME 1, ISSUE 1

As on October 10, let us analyze the liquidity position of the banks from a birds eye view

We can infer the following from the above data

We see an increase of bank credit by 29.19% and 2.55 % on YOY and fortnight basis while the de posit has increased by 21.39% and .79% on YOY and fortnight basis. These points towards tho banks were facing a liquidity problem as the rate of increase of credit was not negated by the rate increase on deposits.The credit deposit ratio as on September 26, 2008 was .7386 while on 10 October it was .7515 anlast year it was .7064 clearly indicating that the industry was facing the liquidity crunch.

Scrutiny of the borrowing and lending activity in the call money market

Let us analyze the situation from august till 10 October.

We see that the difference between the amount borrowed and lent grew from 290 to 577 fro1 Aug to 12 Sept and declined to 450 in 26 Sept but increased to 482 in 10 October. However in percenage terms the difference (or the deficit) grew by 66%.

In the ratio terms , borrowed / lent increased till 15 august declined to .9534 in 12 Septembe but however the credit crunch took its toll on the banks and the ratio increased to .9626 forcing RBI to taksome remedial action.

t o w a r d s

. .

t h e p e o p

l e banks banks diff primary dealers

borrowed lent borrowers lenders BB/BL PB/P1-Aug 11185 11475 -290 347 57 0.974728 6.0877

15-Aug 12401 12661 -260 313 53 0.979464 5.9056

29-Aug 11321 11692 -371 411 41 0.968269 10.024312-Sep 11812 12389 -577 587 10 0.953426 58.26-Sep 10756 11206 -450 472 22 0.959843 21.45410-Oct 12427 12909 -482 510 28 0.962662 18.214

BL=amounts banks lent PB=no of primary borrowersBB= amount banks borrowed PL=no. of primary lenders


14/19

VOLUME 1, ISSUE 1

We can correlate the above explanation with the ratio of no. of borrowers and lenders where we see that the ratio moves inopposite direction of the BB/BL. The ratio increased from 6.08 to58.7 from 1 august to 12 September (when it peaked); however itdeclined to 18.21 on 10 October on account of increase in no. of lenders from 10 to 28 in the relevant period. But when we comparethe ratio from august to October in increased above 200% indicat-ing that borrowers increased from 347 to 510( increase of 47%) ,while lenders decreased from 57 to 28 ( i.e. a decrease of over 50%)forcing RBI to take remedial action.

More bad news!

In October, RBI comes up with the data stating that incremental credit rose to 10.4% in thalf of this fiscal against 4.4% in the corresponding period last year while incremental deposits decto 8.4% from 9.3%.

Infrastructure and consumer companies top the top 50 liquidity challenges companies

Infrastructure and consumer companies whose lifeline is credit face severe crunch as 17 infra com panies and 13 consumer companies were identified who accepted that they were facing severe crecrunch.

All the above were the indicators that the RBI needs to take extra ordinary measures to control collapse of the banking system and save companies by making reforms ensuring better credit functioning.

Events watch

Let us have a look at the series of events that were worth keeping track of, the reactions of the governmenand RBI and what happened as a result of the actions (discussed later).

Sectors Crunch companies Infrastructure 17

Consumer 13 Healthcare 4Real-estate 3

Chemicals 2Oil gas 2Media 2

Technology 1Power 1Others 5

t o w a r d s

. .

t h e p e o p

l e


15/19

VOLUME 1, ISSUE 1

t o w a r d s

. .

t h e p e o p

l e 16 Government identified 14 commercial banks (11 public and 3 private) and will hel

them to raise over 5000 crore to increase the Capital Adequacy Ratio (CAR) to12%. These banks include Central Bank of India, Allahabad Bank, Uco Bank, IndianOverseas Bank, ING Vysya Bank , Vijaya Bank , Bank of Maharashtra.However none of these banks had CAR less than 9% which is the prescribed limit as

per the Basel 2 normsHike in NRI deposits by 50 BPS to counter the out flux of the Forex reserves due toFII selling in Stocks

17 Banks put SMEs on edge while lending amidst liquidity crisis . SMEs account for 40% the exports and if the credit line dries up then their business prospects will take a hit and willfurther add to the declining foreign reserves( on account FIIs selling in sensex ).

19 Government has also asked the RBI to release Rs 25,000 crore to banks and finan-cial institutions immediately against their outgo under debt waiver scheme .No bank guarantee of LOC from foreign banks is accepted by domestic banksthey fear the failure of foreign banks would further acute their liquidity problems

20 Reserve Bank has lowered the repo rate by 1 per cent to 8% from 9% earlier,under LAF . The decision was aimed at improving the liquidity position in the coun-try.The apex bank has opened a special repo window of Rs 20,000 crore for mutualfund industry to help them meet their liquidity needs and overcome redemptionpressure.

22 Government promises full support and help to Public Sector Banks(PSBs) to im-prove CAR to 12%. Federal bank to review the acquisition of catholic Syrian bank amidst liquidity crisis.It will review the valuation of the bank as well as source of funds.

23 Banks ask RBI to ease reserve requirements else they will stop lending to infrastruc-ture companies.ICICI Bank had raised the interest rate for new home loans from 12 per cent to13 per cent earlier this month, but it kept unchanged the benchmark rates, includingits Floating Reference Rate (FRR) for home and other consumer loans.

24 The Reserve Bank of India shall conduct a special fixed rate term repo at 8 per cent per an-num against eligible securities for Rs.11,200 crore on October 24, 2008, due for reversal on

November 7, 2008, with a view to enabling banks to meet the liquidity requirements of mu-

tual funds

Oct Events

10 ICICI Bank said that it is facing no liquidity crisis and has as much as Rs 12,000 crore liquidity even in international markets and the bank does not use rupee liquidity to fund thegrowth of its international operations and says NPA is zero even in UK where the exposure is worth 4700 crore

13 ICICI script plunges 17% amidst the fear that the bank is facing severe liquiditycrunch.

15 Reserve Bank of India said it will conduct the special fixed rate 14-day repo facilityevery day, as the auction for a notified amount of Rs 20,000 crore at 9 per cent tomeet the liquidity requirements of mutual funds. RBI decides to raise the cap on deposit insurance from 1 lac to 2 lac to ensure con-fidence of the depositors in deposits The Reserve Bank said it would shortly issue Rs 100 denomination notes


16/19

VOLUME 1, ISSUE 1

Micro scan of the government action and the reaction of the money market

RBI auctioned REPO under LAF which resulted in pulling the overall call money rates dowThis was a result of injecting liquidity which in turn forced banks to bring the call money rates down. Leus see the movements of the call money rates from Oct 10 to Oct 17.

Oct 10

Rates reach as high as 22% while the minimum was 14.25%.

Oct 13

RBI auctions repo and injects 55440 Crore that tames the call money rates to a maximum of 10.05 anminimum to as low as 8.5%

Oct 14

Further RBI injects 66305 cr. Via REPO auctions but we see a marginal increase call money rates

Oct 15Further 59090 cr. Is injected but there is no major decline in the rates on the same day

Oct 16

However when a cumulative 180835 cr. Is injected in 3 days, the call money rates calm

down further and hovered in the range of 5.65 to 7.1

Same day further 10100Crore is injected.

Oct 17Seeing that call money rates has declined significantly RBI auctioned just 8640Crore and rates seemed t

be stable between 5.5 and 7%.

Oct 20

Maximum rate remained at 7% while minimum rate declined to 3.5%

Thus a total of 199525 cr. was injected in just 5 days time.

t o w a r d s

. .

t h e p e o p

l e

Oct 10 Oct 13 Oct 14 Oct 15 Oct 16 Oct 17 Oct Amount injected(Rs. Crore)

- 55440 66305 59090 10100 8640 -

Call money rates(min %)

14.25 8.5 8.6 8.5 5.65 5.5 3.5

Call money rates(max %) 22 10.05 10.15 10.5 7.1 7 7


17/19

VOLUME 1, ISSUE 1

What is the status of the money market as on 24 October 2008?

From the above data we can infer the following:

Decline in the minimum and maximum rates of the call money rates when compared with the prevous week. The minimum rates have fallen from 7.0 to 4.5 while the maximum rates have fallefrom 10.0 to 7.0. The volume in call money rates has seen an increase of 12.83% as compared the previous week.Decline in the minimum and maximum rates in repo. The minimum rate has decreased from 6.5 4.5 while the maximum rate has declined from 9.5 to 7.0. the volume increase in this instrument acompared to the previous week is 15.84%

91 day and 364 day t-bill has witnessed a decline in the both minimum and maximum rates whithe overall rates for the 182 day t-bill has increased. The volume of these instruments has registerea decline of 16.71%, increase of 126%, and 182 day T-bill has registered a decline of 36.66%.The minimum rates for the GOI securities has registered an increase of .05 %( which is marginagiven the volatility) while the maximum rate has shown a decline of .14%. The increase in volumis 2465 Crore (or 41.29%).When comes to volatility in rates the most volatile instrument is call money rates and GOI securties which is .65 followed by repo. The least volatile was state government securities whiwas .11.

Impact of the liquidity crisis on the Banking Index:

We see that the Bankex index closed at 4649.87 and gave a negative return in 1 week, 1 monand 1 year of 16.17%, 32.25% and 53.15% respectively. There was a selling both from FIIs and retail investors. FIIs faced liquidity problems at home while retail investors feared safety of investments.

,

24-october 2008 1 week 1 month 1 year Bse Bankex 4649.87 -16.17 -32.25 -53.15

t o w a r d s

. .

t h e p e o p

l e

Rates in % Volume (rs crore) This week Standard de-

viation Previous

week This week Previous

week Call money 4.5-7.0 .65 7.0-10.0 15767.26 13974.21

Repo 4.5-7.0 .49 6.5-9.5 60756.13 52446.9

91 day T-Bill 6.19-7.45 .23 6.5-8.56 797.38 957.72

364 day T-bill 6.25-7.55 .28 7.25-9.05 1715.64 756.10

182 day T-bill 6.9-8.0 .24 4.18-8.64 349.56 551.65

GOI securi-ties

6.99-9.3 .65 6.94-10.07 8435.12 5970.94

State govern-ment

7.87-8.35 .11 7.88-8.43 442.43 297.27


18/19


19/19

VOLUME 1, ISSUE 1

Contact Us & Post Articles ateditors.towards@gma

Join us and get E-copies at-

http://groups.google.com/group/ibs_towards

t o w a r d s

. .

t h e p e o p

l e

Disclaimer:This magazine is a compilation of articles from various sources. Thus, readers are expected to cross-check the facts before relying upon them. Though much care has been taken to present the facts without error, still if errors creep in, necessary feed backs will be always welcomed. Editors will not be responsi-

ble for any undertakings. The magazine is not meant for sale and hence, no part of the it should be used without the prior permission of the editorial team.

Sources:The Economics Times, Business Line, Business Standard, Financial Express, Financial Times, Wall

Street Journal, DNA, The Deccan Chronicle, The Times of India, The Hindu, The Telegraph, BusinessWeek, Business World, Business Today, India Today, The Economist, Forbes, Bloomberg, Reuters, In-vestopedia.com, Wikipedia.com, Moneycontrol.com, Vccircle.com, yahoofinance.com.

towards 10th issue

Documents