The document provides an overview of the state of the global and Indian economies in light of the ongoing financial crisis. Key points include:
1) The IMF has downgraded its global GDP growth forecasts for 2008 and 2009 as major economies face recession. Emerging markets will also slow substantially.
2) Housing prices and industrial production continue to decline in the US and unemployment is rising sharply. Financial markets remain volatile.
3) India's growth is moderating but inflation is slowing. However, high deficits, slowing consumption and investments, and capital outflows pose challenges.
4) Global equity markets have seen large losses in 2008 on risk aversion. Indian markets are also highly volatile though the Sensex has
3. World economy to slow down considerably
Source: International Monetary Fund, World Economic Outlook November 2008
Note: Annual percentage changes in GDP for 2008 and 2009 are IMF estimated numbers
After recording strong growth for four years, global economy is heading towards a downturn led by advanced
economies. IMF has estimated a World GDP growth of 3.7% for 2008 and 2.2% for 2009.
4. US economy weakening…
Source: Bureau of Economic Analysis, United States
Note: Percentage changes in GDP are over the corresponding period in the previous year. Q3-2008 numbers are preliminary estimates
Experts including Federal Reserve Chairman Mr. Ben Bernanke now believe that the weakness in the US economy
may continue through 2009. A U-shaped recovery seems to be the most likely scenario.
5. …and so are other developed economies
Source: IMF World Economic Outlook November 2008
Note: GDP growth is over the previous year. Growth for 2008 and 2009 are IMF projections
With credit crisis spreading to Europe and Japan, those economies may also suffer a setback in terms of GDP
growth. IMF forecasts that almost all advanced economies may now go into a recession.
6. Emerging Economies shall also slowdown
Source: IMF World Economic Outlook November 2008
Note: GDP growth is over the previous year. Growth for 2008 and 2009 are IMF projections
Economic growth in emerging economies shall also slow down as per IMF estimates. IMF in its November 2008
outlook has projected India’s real GDP growth to come down to 6.3 percent in 2009.
7. Home Prices in US continue their decline
Source: Standard & Poor’s
Note: Composite CSXR is a composite index of the home price index for the top 10 Metropolitan Statistical Area's in the United
States . S&P Case-Shiller Composite 20 is a value-weighted average of 20 metro area indices.
The S&P Case-Shiller Indices have corrected by approximately 20% from their peaks in June-July 2006. The home
prices continue to correct as there is an oversupply situation in residential market in US.
8. Falling Home Prices, Rising Foreclosures in US
Source: Foreclosure Filings are from RealtyTrac, US. Case-Shiller Index values are from Standard & Poor’s
Note: S&P Case-Shiller Composite 20 is a value-weighted average of 20 metro area indices
As the home prices started falling and mortgage rates resetted at higher levels, the interest burden on home-
owners increased. The sub-prime borrowers failed to refinance their loans and hence foreclosed their mortgages.
9. Rising Unemployment in US is hurting Consumption
Source: Bureau of Labor Statistics, United States
Note: The unemployment data is seasonally adjusted
Rapid rise in unemployment in US is bothering both Fed and the President-elect Barack Obama. Mr. Bernanke in
his several testimonies has quoted that unemployment scenario is going to get worse before it gets better.
10. Tale of “The Crisis” using CBOE VIX
Source: Internal Research
11. Tale of “The Crisis” using CBOE VIX
I.
Fannie Mae/Freddie Mac placed into a conservatorship run by the Federal Housing Finance Agency (FHFA)
Bank of America announces plans to acquire Merrill Lynch. Lehman Brothers files for Chapter 11 protection,
marking the largest bankruptcy in US history.
American International Group (AIG) scrambles for capital after rating downgrades. Federal Reserve announces
creation of credit facility of up to $85 billion for AIG.
Goldman Sachs and Morgan Stanley become bank holding companies. NY Fed immediately provides access of
bank’s broker dealer arms to Fed’s Primary Dealer Credit facility.
JP Morgan Chase announces plans to acquire Washington Mutual.
House of Representatives reject the US$ 700 billion bailout plan (asset purchase legislation).
Citigroup announces plans to acquire Wachovia’s banking operations for US$ 1/share. Wells Fargo enters the
fray and raises the bid to US$ 7/share.
Sub-prime crisis spreads to Europe - HBOS, Hypo Real Estate and Fortis fail. HBOS acquired by Llyods TSB,
Hypo Real Estate rescued by German government and Fortis is nationalized before being acquired by BNP
Paribas.
12. Tale of “The Crisis” using CBOE VIX
I.
US Senate and House of Representatives approve Troubled Assets Repurchase Program (TARP). The legislation is
called Emergency Economic Stabilization Act of 2008.
G-7 meeting results into a slew of measures being taken by the Central banks across the world. Fed authorizes swap
lines of unlimited extent with BoE, ECB, SNB and BoJ to ensure sufficient dollar supply.
Coordinated rate cuts by central banks. Fed, ECB, BoE, Sweden, Canada, Switzerland cut their benchmark rates by
50 bps, Chinese central bank by 27 bps and Australian central bank by 100 bps.
After Ireland guarantees all its deposits, Germany, Denmark, Austria announced that they will also protect their
savers and guarantee deposits. Many governments announce a guarantee on the interbank deposits and new debt.
Fed announces to buy commercial paper directly from the corporates to keep the credit growth buoyant.
Several emerging economies including Pakistan, Belarus, Hungary etc. having high current account deficits
approach IMF for assistance.
South Korea announces a package of US$ 130 billion to guarantee foreign exchange debt.
Federal Reserve cuts the target rate by 50 bps to 1%. Bank of England cuts its benchmark rate by 150 bps to 3%
while ECB cuts its rates by 50 bps.
China announces an economic stimulus package of US$ 586 billion to be spent on Infrastructure till 2010.
13. It’s a Crisis of Confidence more than anything else
Source: US Federal Reserve
The yield of three-month US Treasury Bill almost dropped to zero after Lehman Brothers filed for bankruptcy. The
crisis has resulted in huge money shifting into US Treasury thus driving the yields to an all-time low.
14. LIBOR shooting up signifies risk aversion
Source: British Bankers Association
Note: These are US dollar LIBOR rates
The credit crisis has led to a liquidity squeeze. Financial Institutions are not lending to each other because of the
fear of default by the counterparty. This has led to the LIBOR shooting to decade-high levels.
15. Corporate bond spreads in US have shot to all-time highs
Source: US Federal Reserve
The corporate bond spreads (both AAA and BAA with 10-year US Treasury) have shot up significantly in the last 8-
10 months. The average spread of AAA in the last 55 years has been 77 bps (as compared to 196 bps at end-
September 2008) while that of BAA has been 173 bps (as compared to 362 bps at end-September 2008).
16. Sub-prime related losses
Source: Financial Times, October 1, 2008.
Note: The data is collated and updated by Bloomberg till September 30, 2008.
The total sub-prime losses/write-downs estimated by Bloomberg as on September 30, 2008 stand at US$ 586 billion.
Experts believe the losses could top US$ 1 trillion going forward.
18. Global Inflation
Source: International Monetary Fund World Economic Outlook, October 2008
Relentless rise in crude and commodity prices through 2007 and in the first half of 2008 made stagflation a potential
threat. With expectations of a global economic slowdown firming up, commodity prices have corrected to factor in
the demand destruction that may happen because of lower growth. Economists argue that global economy may get
into a stag deflation kind of a period in the short to medium term.
19. Coordinated efforts by Central Banks
Note: Federal Reserve funds rate, Bank of England bank rate, ECB target refinancing rate, Bank of Japan Target rate and People’s
Bank of China one-year lending rate
Central banks across the globe have responded to the crisis in a coordinated fashion and cut their benchmark rates.
They are also pumping money into the system, capitalizing their banks and guaranteeing deposits.
21. Indian GDP growth shall moderate
Source: Central Statistical Organization, National Accounts
India’s real GDP growth is set to moderate in 2008-09. The Prime Minister’s Economic Advisory Council has
forecasted a growth of 7.7 percent for this fiscal. Various estimates put the growth between 7-8 percent.
22. High Inflation…
Source: Office of Economic Advisor
Note: 2008-09 weekly averages till week ending October 25, 2008. Inflation over the corresponding period last year
From the peak of 12.63%, Inflation in India has moderated to 8.98% for the week ending November 1, 2008.
Good monsoon and sharp correction in global commodity prices have brought down the inflation expectations.
23. …forced RBI to tighten the monetary policy
Source: Reserve Bank of India
RBI remained extremely hawkish on Inflation till August 2008. However, as the prices of commodities came off
their highs and global liquidity situation deteriorated, RBI in the month of October aggressively cut CRR and Repo
rate. On November 1, a lot of other monetary measures including reduction of SLR were announced.
24. …which has adversely impacted the Industrial growth
Source: Central Statistical Organization, India
Monthly IIP growth has remained extremely volatile during this calendar year. However, there is no denial that IIP
is in a clear downtrend. Now that IIP is falling, experts including Finance Minister have raised concerns on the
constituents of IIP and their weights in the Index.
25. Trade deficit is at a record high…
Source: Department of Commerce, Government of India
Note: Data for 2008-09 is for April – September while that of 2007-08 is provisional
As India imports two-thirds of its crude requirement, the trade deficit for the first half is already 75% of the full-
year trade deficit of 2007-08. Sharp and rapid rupee depreciation has also hurt the importers in the recent months.
26. …and fiscal position is also deteriorating
6.5
Estimated Fiscal deficit (incl. off-budget liabilities)
6.2
6.0 Fiscal deficit excl off-budget liabilities
Budget estimate
5.9
5.5
fiscal deficit/GDP (%)
5.0
4.5
4.5
4.0
4.1
4
3.5
3.2
3.0
3.4
3.2
2.5
2.5
2.0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08RE 2008-09F
Source: CRISIL Research
Note: The major off-budget liabilities are fertilizer and oil subsidies.
The subsidies provided to oil marketing and fertilizer companies can blow up the fiscal deficit number. Besides, the 6th
pay commission increases and a potential slowdown in direct and indirect taxes may also worsen the fiscal situation.
27. Balance of Payments Situation doesn’t look good either
Current account balances have
deteriorated in this fiscal mainly
because of rising trade deficit.
On the other hand, capital is
hard to come by because of the
global liquidity crunch.
Foreign Institutional Investors
who brought over US$ 17
billion in calendar 2007, have
pulled out over US$ 13 billion in
this calendar year till October.
FDI flows have been robust and
that gives some solace.
Source: Reserve Bank of India, SEBI
and Department of Commerce, India
28. Foreign Exchange Reserves though substantial have depleted
Foreign Exchange Reserves
have depleted at a rapid rate this
fiscal. Forex reserves have lost
over US$ 50 billion primarily
due to euro-dollar movements
and RBI selling dollars in the
currency market to support the
Rupee.
RBI is seen supporting Rupee
near 49-50 levels as sharp
depreciation of INR hurts
importers.
Source: Reserve Bank of India,
29. Tight Liquidity Conditions led to monetary easing
Source: Reserve Bank of India
The liquidity in the Indian financial system became extremely tight in late September and early October, a
phenomenon observed across the globe. RBI acted swiftly and cut CRR and Repo rate and opened new LAF
windows for mutual funds and NBFC who were under tremendous pressure due to inadequate liquidity.
30. Credit & Money Supply growth remain above RBI targets
Source: Reserve Bank of India
RBI in its mid-term review has stated that credit growth was at 29.4% on a y-o-y basis upto October 10, 2008
compared to 23.1% a year ago. Similarly, the money supply growth of 20.3% is also above the RBI target of 17%
31. Private Final Consumption Expenditure
Source: Economic Survey 2007-08
India’s domestic consumption as a percentage of GDP is quite high which is comforting. That said, a slowdown in
consumption demand cannot be denied with job market becoming weak and disposable incomes not growing the
way that have been in the last few years.
32. Gross Domestic Capital Formation (Investments)
Investments have become an
engine of growth in the past five
years. However, as the
economic growth gets into 7%
zone, Investment from the
private sector may come down
in the short to medium term.
We have witnessed robust FDI
inflows during the last six
months that indicate that as and
when the financial crisis gets
over, India can get on to that
high growth trajectory
Source: Economic Survey 2007-08
33. Gross Domestic Savings
Savings will remain the mainstay
of Indian economy. With
current savings rate hovering
around that 35% mark, RBI
projections say that Gross
Domestic Savings may actually
reach 36% of GDP by the end
of 11th five year plan.
Source: Economic Survey 2007-08
Source: Reserve Bank of India
34. Demographic Dividend (Working population 15-64 years)
Source: United Nations
A population bulge in the working age group (15-64 years) is seen as an inevitable advantage characterized as a
quot;demographic dividendquot;. India is, & will remain the youngest economy till 2050 with a median age of 38.6 years, as
compared to China with 45 years & Japan with 54.9 years.
36. Returns of major world indices
Source: MFI Explorer
Note: All Ordinaries – Australia; Dow Jones and Nasdaq – US; FTSE – UK; CAC 40 – France; DAX –
Germany; Strait Times – Singapore; Hang Seng – Hong Kong; RTS – Russia; SSE Composite – China;
Bovespa Sao Paulo – Brazil; Kospi – South Korea; Nikkei – Japan
Equity markets across the world have registered huge losses in 2008. The primary reason is the flight of capital from
riskier assets to safer assets like Treasury and sovereign bonds.
37. Returns of major world indices
Source: MFI Explorer
Note: All Ordinaries – Australia; Dow Jones and Nasdaq – US; FTSE – UK; CAC 40 – France; DAX – Germany;
Strait Times – Singapore; Hang Seng – Hong Kong; RTS – Russia; SSE Composite – China; Bovespa Sao Paulo –
Brazil; Kospi – South Korea; Nikkei – Japan
Majority of the benchmark equity indices are giving negative returns on a 3-year basis. Sensex has however
performed quite well over its peers on a 3-year period.
38. Indian Equity Markets – Sectoral Indices performance
Source: MFI Explorer
BSE Realty Index has lost close to 85% of its value in 2008. The Real estate sector is under severe strain due to
high interest rates and reduced affordability because of high prices. BSE Metal which is the second worst
performer has lost most of its value since August 2008 after the commodity bubble burst.
39. Unprecedented volatility in Equity markets
Source: National Stock Exchange, India
Unprecedented volatility has been observed in the global equity markets in the last two months and India is not
different in that regard. India VIX, which is a measure of market’s expectation of volatility over the near-term has
almost gone up 100% since its inception on November 1, 2007.
40. Fund flows in Indian equity market
Source: Securities and Exchange Board of India
FIIs have been in the thick of action during the last few years. A lot of capital was brought in by the FIIs which
took the Sensex to 21,000 in January 2008. Since then, it has been a trend reversal. Although Mutual funds have
bought equities, but their scale is much less as compared to foreign investors.
41. Equity market volumes have dipped
Source: National Stock Exchange of India
Market volumes have thinned considerably during the last 7-8 months, a clear sign of risk aversion prevailing in
the market. Total cash & F&O volumes have dipped by as much as 44% from October 2007 to October 2008.
42. Corporate Performance showing first signs of strain
Source: Capital Line
The growth in EBITDA and PAT has come down sharply from its highs. The top-line growth has also started
moderating from Q2-FY09 and as slowdown becomes more pronounced, revenues will be adversely impacted.
43. Margins remain under pressure
Source: Capital Line
Margins both EBITDA and PAT have depressed in the last three quarters on the back of higher input costs. The
recent drop in commodity prices shall come into effect from Q3-FY09 but this time around realization from sales
may also come down.
45. Wholesale Debt Market trends
The debt market capitalization
has consistently increased over
the past years. Corporate debt
market however, continues to
remain very shallow. The
Government debt market still
forms 88% of the market
turnover.
FII debt investment limits in
corporate bonds were raised
recently from US$ 3 billion to
US$ 6 billion, which was availed
instantaneously. SEBI has also
proposed a lot of reforms for
the Indian corporate bond
market.
Source: National Stock Exchange, India
46. 10-year bond yields
Source: Reuters and Office of Economic Advisor, India
Yields of the 10-year Government paper moved up to as high as 9.4% before coming down below 8% as
inflation expectations cooled off. The yields went below 7.5% after the inflation data for week ending November
1, 2008 came at 8.98%
47. Corporate bond spreads have gone up
Source: Reuters
Corporate bond spreads have risen in the past few months mirroring the global trend. The 5-year AAA corporate
bond spread rose to as much as 400 basis points.
49. Dollar has gained against majority of the currencies
Source: Federal Reserve, United States
Dollar has appreciated sharply against Euro and other major currencies since mid-July 2008. Yen is the only currency
that has gained against dollar. Analysts believe that this phenomenon has got to do with the reversal of yen carry
trade that prevailed for several years.
51. Crude Oil now below US$ 60/barrel
Source: Reuters and Federal Reserve, United States
Crude oil has now corrected by over 60% from its peak in July 2008. The primary reason for the oil price correction
is the expectation of demand destruction that may happen in the forthcoming years of global slowdown. Besides, US
dollar has appreciated notably against Euro in the past few months.
52. Gold
Source: www.gold.org and Federal Reserve, United States
Considered to be a safe haven, investors shifted their money to Gold leading to its prices breaching the US$
1000/ounce mark for the first time. However, gold has corrected in line with other commodities in the past one
month as US dollar continues to appreciate against major currencies.
53. Copper
Source: London Metal Exchange
Copper prices also corrected by around 60% after getting hit by the concerns of lower demand going forward.
56. Outlook
The advanced economies led by US are likely to have a negative GDP growth for the next few
quarters on the back of slowing private consumption. There is a growing consensus that economic
recovery in these economies would be U-shaped at best and L-shaped at worst.
Emerging economies including India and China shall also have spillover effects of this slowdown in
advanced economies. Various international agencies and rating companies have already put a watch
on India and downgraded its growth forecast for 2009 and 2010.
As we run a high fiscal deficit, we don’t have any headroom for an economic stimulus package like
China. Hence, an economic slowdown can affect the job market adversely, which in turn can impact
consumption demand.
On the domestic front, Q3 corporate results could come as a negative surprise to markets. General
elections mid-next year and the resulting government shall be instrumental in giving markets some
direction.
We expect markets to remain range-bound and quite volatile at least for the next six months. It will
continue taking cues from the global markets and price in the negative news coming in from all
quarters.
Even if we revise down the earnings of Sensex companies, the Sensex currently trades at around 9-
10 times Price-Earnings multiple on FY09 earnings estimates. If we take the inherent value in some
stocks into account, this multiple comes down further.