IMPACT ON AMERICAN AND INDIAN ECONOMY

PRESENTATION BY:RAJNEESH KARLOOPIA

Subprime mortgages are loans to borrowers with imperfect credit criteria. About 21 % of all mortgage originations from 2004 through 2006 were subprime, up from 9 % from 1996 through 2004 Other higher risk mortgages included Alt-A (i.e.. low documentation) and NINJA (no income, no job/assets) loans.

The Housing Downturn Excess supply of home inventory Sales volume of new homes dropped Reduced market prices (10.4% 12/06-12/07)

Borrowers Difficulties in re-financing Begin to default on loans Walk away from properties Fraudulent misrepresentations

Financial Institutions Attraction from high returns Offered high-risk loan and incentives Believes that will pass on the risk to others

Stock Market

08/15/07 Dow Jones had dropped below 13,000 from Julys 14000 First 3 weeks of 08, the Dow Jones Industrial Average fell 9% 1/18/08 Dow Jones/0.5%, S&P 500/0.6%, and NASDAQ/0.3% 01/21/08 (black Monday) the worlds biggest falls since Sept. 11, 2001

Financial Institutions Bankruptcy

New Century Financial (USA) Apr. 2, 2007 American Home Mortgage (USA) Aug. 6, 2007 Sentinel management Group (USA) Aug. 17, 2007 Ameriquest (USA) Aug. 31, 2007 Net Bank (USA) Sept. 30, 2007 Terra Securities (Norway) Nov. 28, 2007 American Freedom Mortgage Inc. (USA) Jan. 30, 2007

Financial Institutions Write-Downs

Citigroup (USA) - $24.1 bln Merrill Lynch (USA) - $22.5 bln UBS AG (Switzerland) - $16.7 bln Morgan Stanley (USA) - $10.3 Credit Agricole (France) - $4.8 bln HSBC (United Kingdom) - $3.4 bln Bank of America (USA) - $5.28 bln CIBC (Canada) 3.2 bln Deutsche Bank (Germany) - $3.1 bln

Home Owners Housing prices down 10.4% in Dec. 07 vs. year-ago Sales of new homes dropped by 26.4% in 07 vs. 06 By Jan. 2008, the inventory of unsold new homes stood at 9.8 months, the highest level since 1981. Two million families will be evicted from their homes

Economy Condition Recession Low GDP growth rate Business close out or lose money (banks, builders etc.) Weak financial market Low consumer spending Lose jobs

Investors will be very cautious to act Lack confidence in stock/bound market Consumer spending will slowdown Lack of cash or unwilling to spend World economy may slip into recession U.S. economy condition will affect global economy GDP growth will be low Lose businesses Lose jobs Economy slow down

Financial market May take long time to recover Unemployment rate may be high Slow economy increase unemployment rate Exports will decrease in China, Korea, Taiwan GDP growth heavily depends on export

08/2007, President Bush announced Hope New Alliance 02/13/08, President signed a tax rebates of $168 bln 09/18/07, the Fed dropped rate point 10/31/07, point cut by Fed 12/11/07, point cut by Fed 01/22/08 the Fed slashed the rate by 3/4 points to 3.5% 01/30/08 another cut of 1/2 points to 3% Central Banks have pumped billions of dollars to banks Central Banks of the world have done the same thing

Indicator Real GDP Growth Industrial production Services Exports Imports GFD/GDP Stock Market (BSE Sensex) Rs.per US$

Period April-December April-February April-December April-March April-March April-March April-March April-March

2007-08 9.0 8.8 10.5 28.4 40.2 2.7 16,569 40.24

2008-09 Growth, per cent 6.9 2.8 9.7 6.4 17.9 6.0 12,366 45.92

 No subprime
No bank losses threatening capital No bank credit crunch

No mistrust between banks

 Reduction in capital flows

Pressure on BoP Decrease stock markets

Monetary and liquidity impact

Reduction in flow from non-banks Perceptions of credit crunch

Oil, Fertiliser, Food subsidies

Pay Commission

Expanding rupee liquidity

Reduction in CRR & SLR Special Repo window under LAF for banks on-

lending to NBFCs,& MFS Special Refinance to banks without collateral

Existing instruments- enough flexibility Rupee-dollar swap facility for banks with overseas branches
ECB norms relaxed Allowing corporate to buy back FCCBs

Encouraging Flow of credit Exporters:

extension of period for export credit. Expansion in refinance

Dynamic provisioning
Contra cyclical adjustment of prudential norms

SIDBI and NHB: lendable resources expanded Loan restructuring

Measures ensuring orderly functioning of Indian financial

markets Cumulative potential primary liquidity impact over Rs. 4,90,000 crore (9 % of GDP) Comfortable liquidity position since mid-November, 2008 Government yields: upward pressure from large market borrowing programme Proactive management by RBI

Avoid high volatility in monetary policy Appropriate response of monetary policy to asset prices Manage capital flow volatility Look for signs of over leveraging Active dynamic financial regulation Capital buffers, dynamic provisioning Look for regulatory arbitrage incentives/ possibilities

Indias fundamentals remain strong

Financial sector robust Monetary policy sufficient instruments, flexible Corporate sector not too leveraged second round of

restructuring going on productivity gains Foreign direct investment buoyant Agriculture improving Growth domestically financed Indian economy should be able to recover fast and return to 9%+ growth path