Professional Documents
Culture Documents
REAL ESTATE
Project Report
Dr.Anu Lather
By
Niharika Yadav
Enrolment No.0241669008
)
University School of Management Studies
Guru Gobind Singh Indraprastha University
Kashmere Gate, Delhi-110006
June 2006
Abstract:
The report is prepared in the head of the topic impact of global financial crisis on
Real Estate. It mainly concentrate on the general facts which are directly affecting
the Indian economy that is what all the financial crisis is about and what are the
poising factors affecting the Indian economy like the affect of the inflation,
banks, capital market, GDP, balance of payment, industrial growth, oil prices,
employment and the companies which are dependent on the down fall of the US Banks.
Executive Summary:
There was a time when India was discussed as the land of snake charmers,
black magic and epidemics but the revolutionary Indian growth story changed
everything. Indian economy at its height compelled the world to change its
viewpoint towards India. Out of the several factors which changed the face of
modern India, we are going to discuss the most roaring of them i.e. our share
market. The earlier reform procedures adopted by India gave India the two most
sought after world-class brands i.e. SENSEX and NIFTY. The magical figures
displayed by our market turned all the heads on India. And India became one of
the most favoured places for investment.
Now we are going to deal with the ups and downs in the share market since last
two years
i.e. since year 2006.our share market has went through many phases in there 2
years. We saw the investors getting overjoyed at 21K and we saw them crying
too when it crashed. We saw how the market rewarded the undervalued shares
and how the overvalued shares fell down to demonstrate the saying everything
which rise more than expected, has to fall.
So to analyze the saga of Indian share market, we had two indices to follow: BSE
sensex and NSE nifty. Though NSE nifty is a more advanced option and has left
BSE sensex far behind, still we call BSE sensex as the barometer of our economy.
Thats why we have followed the BSE sensex. It was not possible to track each and
everyday figure of the sensex since last twoyears. The performance of the sensex
is analyzed with the help of data and graphs collected from
3
various sources and some of the most talked about movements of sensex starting with
the secondary market summary of each year, firstly year 2006 and then year 2007.
The global financial crisis, brewing for a while, really started to show its effects in the
middle of 2007 and into 2008. Around the world stock markets have fallen, large
financial institutions have collapsed or been bought out, and governments in even the
wealthiest nations have had to come up with rescue packages to bail out their financial
systems.
On the one hand many people are concerned that those responsible for the financial
problems are the ones being bailed out, while on the other hand, a global financial
meltdown will affect the livelihoods of almost everyone in an increasingly interconnected world. The problem could have been avoided,if ideologues supporting the
current economics models werent so vocal, influential and inconsiderate of others
viewpoints and concerns.
Certificate
This is to certify that the project entitled Impact Of Global Financial Crisis On
Real Estate is a bonafide work done by Niharika Yadav (Enrolment No.
0241669008) of MBA Real Estate (June-2008-2010) in partial fulfillment of the
requirements for the degree of Masters of Business Administration of this
Institute.
Internal Evaluator
External Evaluator
Director
Acknowledgement
I express thanks and gratitude and indebtedness to Dr. Anu. Lather,
Dean M.B.A, Indraprastha University my project guide for her encouraging
support and guidance in carrying out the project. She constantly encouraged me
and showed the right path from day first till the completion of my project. My
grateful appreciation is also extended to Dr. Kuldeep Chandra, for his immense
moral support. I would also like to thank all those from whom I have collected the
primary data for this project for their valuable time and views
I would like to express gratitude to my father Prof. Ravinder
Singh Yadav, for his valuable advice and guidance without which this project
would not have seen the light of the day.
I thank Mr. Ankur, for encouragement and guiding me in
completing my project successfully. I would like to thank Mr. Anil Rawal for their
kind co-operation and guidance. I would like to thank my friends for being
supportive all the time, and I am very much obliged to them.
However, I accept the sole responsibility for any possible errors of omission and
would be extremely grateful to the readers of this project report if they bring such
mistakes to my notice.
Niharika Yadav
(0241669008)
Contents
Introduction
Need and Rationale
Objectives of the Study
Research Methodology
Data Analysis and Interpretations
Findings
Recommendations
Annexure/Appendices/Questionnaires
Bibliography
Introduction:
A global recession is a period of global economic slowdown. The International
Monetary Fund (IMF) takes many factors into account when defining a global
recession, but it states that global economic growth of 3 percent or less is
"equivalent to a global recession.
Informally, a recession in a country is a period of declining productivity. In a 1974
New York Times article, Julius Shiskin suggested several rules of thumb to
identify a recession, which included two successive quarterly declines in gross
domestic product (GDP), a measure of the nation's output. This two-quarter
metric is now a commonly held definition of a recession. In the United States, the
National Bureau of Economic Research (NBER) is regarded as the authority
which identifies a recession and which takes into account several measures in
addition to GDP growth before making an assessment. In many developed
nations other than USA, the two-quarter rule is also used for identifying a
recession.
Whereas a national recession is identified by two quarters of decline, defining a
global recession is more difficult, because developing nations are expected to
have a higher GDP growth than developed nations.According to IMF, the real
GDP growth of the emerging and developing countries is on an uptrend and that
of advanced economies is on a downtrend since late 1980s. The world growth is
projected to slow from 5% in 2007 to 3.75% in 2008 and to just over 2% in 2009.
Downward revisions in GDP growth vary across regions. Among the most
affected are commodity exporters, and countries with acute external financing
and liquidity problems. Countries in East Asia (including China) have suffered
smaller declines because their financial situations are more robust. They have
benefited from falling commodity prices and they have initiated a shift toward
macroeconomic policy easing.
10
Despite the global economic forecast for 2009, the annual growth in greenhouse
gas emissions of 3% is only likely to slow modestly. It may even rise over the
long term because of the downturn's impact on global climate talks and the
funding of renewable energy projects.
Yet no one is entirely pessimistic. Experts and industry insiders believe that once
the storm blows over, demand is bound to rise for the same reasons it did
last time a large, young workforce; gradual but consistent liberalization
reforms; and a high rate of consumer and private-sector savings. "The silver
lining is that once this phase ends, land and property prices will be corrected
to rational levels, speculators will be out, and the sector will have stronger
fundamentals," says Shukla. If everyone's prayers go right, the goddess will
eventually be propitiated and her blessings will issue forth once more.
The deadly global financial slowdown will have a very deep impact on the realty
sector
in
India,
which
is
already
fighting
desperate
battle.
Realty sector watchers are of the view that the slowdown will carry a double
edge impact to it. One, as big-ticket banks
, financial institutions and companies are pruning their staff, the market will lose
some
of
the
possible
buyers
of
new
houses.
And, secondly, the affluent NRI community will have second thoughts about
property
purchases
here
in
India.
for
high-end
apartments.
P K Jain, vice president of PNB Housing Finance Limited, feels that the ripple
11
effect of the US financial crisis is going to hit the Indian market as well. We
were expecting good times for it during this season between Diwali and New
Year. Now we are not so sure about that, he says.
"Indian economy is insulated from the crisis The global financial crisis will not
affect us much," [Indian Finance Minister Palaniappan]Chidambaram said, at
first. Chidambaram went on in this vein until both he and his boss [Prime
Minister] Manmohan [Singh] had to reluctantly admit that no developing
economy could possibly remain immune to the global crisis. Still, it was
projected primarily as a financial crisis or at best a precursor to a mild
recession. But no financial crisis is ever a mere crisis of the world of high
finance alone. Just as the gloom on the trading floors soon spread to the
shopfloors in the factories, financial turbulence is just a symptom of the
turmoil in the real economy.
"The contagion is truly global in a globalised world. How can the high
priests of globalisation in India expect to insulate the country from
this all-pervasive crisis?"
12
NEED AND RATIONAL OF THE STUDY:The Indian real estate market has been going through a bad phase since early
2008. It was hit by one and another factors through out the year like higher
interest rates, higher inflation rate followed by sub-prime crisis in United
States of America, job uncertainness etc. leading it to a chaotic market.
The volume in the Real Estate sector has dramatically fallen. There is hardly any
buying and selling activity in the sector at present. The market is in stand still
mode.
Is it the end of the growth story of Real Estate Sector in India? Was it a bubble
which has busted ? Or there is a ray of light on the other side of the tunnel?
Is the sector is going through RECESSION or it is merely CORRECTION which
was overdue?
How long will it remain? What is the broad future outlook of Indian Real Estate
Sector?
13
Objectives Of study: To understand and analyze the Global Meltdown / Recession and its adverse
impact on Indian Real Estate Sector in the present scenario. Further to
understand and analyze the other factors in a broader view, which adversely
affected the Indian Real Sector and its future outlook.
Minor Objectives:To study and analyse the impact of sub-prime crisis, slow down in global
economy, job uncertainness, liquidity crunch, govt. policies etc. on real estate
sector.
To study and analyse the behavior of general individual, Realtors, Developers,
Investors, HNIS and people who are directly or indirectly are involved in Real
Estate Sector.
14
Methodology Adopted: The methodology adopted for the present study was in two parts:
Primary Data:
(a) The methodology adopted for the present study was focus discussion,
interview and close observation through in-house study of Indian Real Estate
Sector post Indian globalization. Since the project is based on action
research it was necessary to build rapport to collect maximum information
from the consumers, investors as well as developers. Hence the researcher
spent considerable time with the people who keep investing in real estate,
actual users, HNIs etc. and renowned developers. The main focus was to
assess the various factors behind
15
factors affecting it and further to analyse their reports / forecast with the past
and present market scenario.
The new moon of the lunar month of Kartika marks Diwali, the Indian festival of
lights, when Hindus across the country worship the goddess of wealth, Lakshmi.
But divinities know full well the laws that govern finance, and Lakshmi may now
be a little tight-fisted about circulating her riches amid the ongoing global credit
crunch.
16
This leads to a decreased demand for goods and services, which in turn
leads to a decrease in production, lay-offs and a sharp rise in
unemployment.
Investors spend less as they fear stocks values will fall and thus stock
markets fall on negative sentiment.
What actually is the global financial crisis and how it has occurred?
In 1997, the global economic community suffered a severe downturn
spurred by the widespread collapse of the currencies in East Asia. In 1998, global conditions
were further strained by a financial crisis in Russia. In 2001, the United States moved into
recession following the dot-com stock collapse. In 2008, the United States fell again into
recession following a rapid decline in housing prices and a consequent rapid contraction in
credit. Is the regularity of these events just bad luck? Partially, yes. However, there is a logic
that connects them, and understanding the current crisis requires a look back at earlier events.
Beginning..
Extremely rapid economic growth
Spread by globalisation
Confidence in central banks and regulators
A correction had to come
The larger the bubble the steeper or longer the correction
17
THE EXPANSION
Everyone loves a bubble
70% of US consumers felt Housing market will crash- WSJ ,April 10,2006
18
0
.
7
%
3China
.
5
%
(
5
.
5
%
)
8India
.
5
%
(
9
.
3
%
)
World6.3%(6.9%)
2.2%(3.0%)
US,China,Europe
Financial
Real estate
Liquidity crunch
19
20
21
help them out, but after a while these firms too stopped extending credit realizing
that the collateral backing this credit would soon lose value in the falling real
estate market, resulting in this big Sub-prime mess.
Why did India market fall?
Once investments by the FIIs in the US turned bad, more money had to be
invested back, to maintain that fixed proportion i.e. to match assets and liabilities
on their books. In order to invest more money in the US, money had to come in
from somewhere. To make up their losses in the sub-prime market in the US,
they went out to sell their investments in emerging markets like India where their
investments have been doing well.
So they started selling their investments in India and other markets around the
world to maintain enough liquidity in the US economy and for their own operation.
Since the amount of selling in the market was much higher than the amount of
buying, the Sensex began to tumble. Additionally, crude prices were in the range
of $120-150 which caused inflation to rise in double digit forcing banks to raise
their interest rates. Thus, higher rates seriously affected real estate, automobile
and banking firms operations and their stock crashed. Moreover, there were
some rumors that even Indians banks had some exposure to these risky MBS
and hence, banking stocks were among the worst hits. The flight of capital from
the Indian markets also led to a fall in the value of the rupee against the US
dollar. The stock market will continue to tumble as long as there is huge selling
pressure from these FIIs.
Since most of FIIs who invest in India are based in the US, the stock market in
India generally closely follows the sentiments in the US economy compared to
that of Japan or European economy.
Stock market and real estate
Lets explore how stock market affects real estate industry. Most of the real
estate developers are publicly listed companies and trade on these stock
22
% drop
75
84
77
88
24
25
Today, which is December 15th 2008, as I write this article, public sector banks
hold a press conference to announce major rates cut and other measures to
boost real estate sector. The highlights of todays meeting were:
Rate for home loans up to Rs 5 lakhs will not be more than 8.5%
Five-year fixed rate terms on up to Rs 5 lakhs home loans
Banks to take 10% margin on home loan of up to Rs 5 lakhs
No process, prepayment fees for home loans
Home loan rate under package can fall if rates fall more, which is likely to
happen
Home loan of Rs 5-20 lakhs for maximum 20 years at 9.25%
India banks margin for Rs 5-20 lakhs loan will be 15%
India state-run banks will offer free life insurance cover for home loans
These new home loan rates will be effective Monday, December 15, 2008 and
expire on June 30, 2009. This has come as good news to some developers while
rest felt disappointed. DLF and Unitech have good presence in sub-20 Lakhs
housing segment, which is also called Affordable Housing. Those operating in
affordable housing hailed these rates cuts. Sanjay Chandra, MD of Unitech,
said It is a big benefit the rates coming down, no processing fees as well as
the fixed nature of it because a lot of people didnt like the uncertainty with the
way interest rates were moving. So I think the fixed rate and also the only option
possibility of downward revision is a good thing for the sector and for us in
general. This might force and encourage other developers to focus on affordable
housing. But the existing home loan borrowers felt dejected because these rates
are applicable to new loans only.
However, these measures may not revive the flagging sector conditions because
a majority of residential projects cost above Rs. 40 Lakhs i.e. where loans are
above Rs. 25-30 lakhs. Industry insiders say that unsold property to the tune of
Rs 20,00025,000 Crores remains stuck in the country. Unless these properties
are sold first, developers may not launch new projects or finish the under
26
November 01 Price
207.2
48.05
47.65
111.85
You may see above that most of these stocks have recovered from their October
lows and are moving north now. Thus, market too looks optimistic about these
companies and the sector as a whole. I am confident that economy will improve
next year and get back to 8-8.5% growth rate.
With the sudden collapse of world leading financial houses,the Indian real estate
players who were already facing the problem of lack of funds due to
economic slowdown and correction in prices would find it difficult to
raise further funds.
27
Among the US financial houses lehman brothers was very bullish on Indian
reality
sector
and
had
an
investment
in
excess
of
US$
Amount/year
12.5
2008
175
2008
200
2007
200
2007
66
2006
16
2008
28
Infrastructure
Thus, the current situation might not affect the companies at the project
implementation level , however we might see heavy selling pressure in the
stocks of these companies by the sinking US financial which have an
exposure to
these companies.
29
Background Issues
Since the early 1980s, the global economy has seen a rapid expansion in the availability of
savings due in great part to the rapid economic growth of East Asian economies. Because
the U.S. economy has historically been viewed as a financial safe haven a safe place for
foreign citizens to bank their savings foreign citizens have often moved their savings to the
United States The financial crises and dislocations of the 1990s enhanced the perception of
the United States as a safe haven. Important to the current crisis, the movement of savings
from abroad into this country significantly increased the financial base of the U.S. economy in
the 1990s and the early part of this decade.
During the 1990s, the United States was in a globally dominant economic position. This led
The federal government and the central bank the Fed to act as a global guarantor of
economic stability. This was seen in U.S. backing of Mexican debt in 1995 and with the Feds
significant injection of money into markets following global crises. Unfortunately, these tools
were blunt. While they aided the foreign community (and the U.S. economy through greater
global stability), these actions tended to again increase the financial funds available in the
United States. Also during the 1990s, and continuing into this decade, the United States ran
very large trade deficits. While the cause of these deficits is subject to various causal
interpretations, the consequence is clear.
Any continuing trade deficit must be balanced over time by a net inflow of financial capital from
abroad. These inflows again increased the availability of financial assets in the United States
Compounding the complexity of absorbing these financial assets was the significant move
Toward deregulation throughout the U.S. economy starting with the Carter Administration.
During the 1980s and 1990s, deregulation moved into the banking industry and allowed for
rapid changes in how banks did business. Two particularly noteworthy changes were the partial
revocation of the Glass-Steagall Act in 1980 and 1999, and the significant decreases in
restrictions on the formation of interstate branch banking operations. These changes increased
the range of activities banks were allowed to engage in and reduced the personal connections
between bankers and borrowers. While it would be foolish to conclude that these innovations
were universally wrong, the rapidity of their introduction did not allow for a sufficient period of
time to develop tools to manage new risks.
30
In retrospect, it is clear that downside risks were underestimated (first in dot-com stocks,
secondin housing, then in financial derivatives). The introduction of these innovative products,
combined with the increased monetary base to fund them, allowed for the consequences of
poor risk control to be significant.
Finally, the Financial Accounting Standards Board changed asset-pricing standards effective
November 2007. This change introduced mark-to-market asset valuation requirements on
Capital assets. As discussed below, the change in accounting standards served to worsen the
credit crisis during 2008.
Keypoints:
1. Foreign savings flowing into the United States made
borrowing inexpensive.
2. Loose domestic policies made borrowing inexpensive.
3. Banking consolidation allowed banks to increase
lending.
banks.
$>
31
purchased. Basic economic theory shows that when the price of one good in the
pair falls, the demand for the other good increases. Hence, the fall in mortgage rates
funded by the factors discussed above serves as the first impetus to rising housing
prices.
Further, deregulation of banks changed banking practices. Initially, this was seen in
the widespread movement to branch banking and bank consolidation. This has
important ramifications for banking practices. Fifty years ago, the neighborhood
banker was the primary source for credit. Further, that banker personally knew
many of his customers. This offered a casual information channel by which a banker
could assess risk. The introduction of larger branch banking institutions eroded this
information channel.
Unfortunately, as the casual information channel was being eroded, the incentive
structure within the financial sector further changed.Historically, the issuer of a
mortgage was likely to maintain anequity stake in that mortgage it would remain
on the books. Financial sector deregulation changed that constraint. Banks and
other financial institutions introduced numerous financial derivatives (for instance,
Collateralized Debt Obligations CDOs) that allowed mortgages (and other types
of debt) to be packaged and re-sold (and as time went by, re-sold again). This
reduced the need for lenders to practice quality oversight if a loan went bad, it
would no longer belong to them. With the growth in foreign savings in the United
States and too much domestic money, lenders found many ready. buyers of this
repackaged debt. Mortgage turnover increased as lending
practices became increasingly weak.
More important for housing prices as mortgage debt
became more easily available, new buyers of housing
entered the market the subprime borrower.
The influx of these new borrowers who would
traditionally not have had access to loans, further
spurred housing demand.
32
Key points:
1. Cheap mortgages drove up home prices.
2.
3.
borrowers
market.
3.Households began using real estate as a
speculative asset.
Credit Crisis
The credit crisis is a direct outgrowth of
the fall in housing prices that began in 2006. While many channels exist by
which the housing prices enter thefinancial sector, the core connection is
straightforward. Every bank or other financial entity in the United States is
required to have capital assets backing its loans. As a rough approximation for
33
every $10 in loans issued by a commercial bank, a bank must have $1 in capital
assets. With the introduction of financial derivatives, financial entities widely used
mortgage-backed securities as a share of the capital backing their operations. As
housing prices decline, the value of mortgage-backed securities decline. Because
banks capital assets are declining in value, they must issue fewer loans. The
tightening of credit conditions necessitated by this logic starts a downward
spiral.
First, tighter credit narrows the market for housing. The fall in demand begins
pushing housing prices further down. Recent buyers of houses begin to find
they owe more on a house than the house is worth (negative equity); this
encourages them to walk away from mortgage obligations and foreclosures
increase. As foreclosures increase, the value of properties next to foreclosed
houses declines. This pushes more homeowners into a situation of negative
equity.
Second, the continued decline in housing prices further reduces the value of
mortgage-backed financial derivatives. As they decline, credit conditions further
tighten. This becomes an increasing problem as variable rate mortgages begin
to reset. Those who were planning to refinance prior to the interest rate reset
find they are unable to do so; regrettably, some also find that they are unable to
afford the now higher payments. Another round of foreclosures ensues.
This cycle continues until the capital assets are fully re-priced (we are not
there yet), stopping the continued contraction in lending. This
34
Keypoints:
1. Falling asset values forced fewer loans to be issued.
2.Fewer loans reduced the demand for housing; this reinforced the initial
decline in home prices.
3.Reduced lending constrained production throughout the economy.
35
36
What lessons can be learned from this crisis? First, no single factor caused it.
Lenders, borrowers, and regulators are all at fault lenders through poor risk
management, borrowers through excessive borrowing and overvaluation of
real estate, and regulators through lax enforcement of the financial sector.
Second, given that this is the second speculative bubble to have formed and
burst in the United States in the past 15 years, better financial risk management is
required. However, better risk management is not easy. The globally
interconnected economy is more complex than the economy of 50 years ago.
Until our management mechanisms improve sufficiently to better quantify the
new and little understood risks of this economy, households, businesses, and
government must tread more carefully. Perhaps twice burned will be sufficient to
teach this lesson.
Key point:
The value of assets held by banks must be restored so that they can resume
lending.
37
38
39
40
US
Euro Area
Germany
France
Italy
Spain
Netherlands
Japan
United Kingdom
Canada
Australia
2001
2002
2003
2004
2005
2006
2007
0.8
1.9
1.2
1.9
1.8
3.6
1.9
0.2
2.5
1.8
2.1
1.6
0.9
1.0
0.5
2.7
0.1
0.3
2.1
2.9
4.2
2.5
0.8
-0.2
1.1
3.1
0.3
1.4
2.8
1.9
3.0
3.6
2.1
1.2
2.5
1.5
3.3
2.2
2.7
2.8
3.1
3.9
2.9
1.6
0.8
1.9
0.6
3.6
2.0
1.9
2.1
2.9
2.8
2.8
2.8
3.0
2.2
1.8
3.9
3.4
2.4
2.8
3.1
2.7
2.0
2.6
2.5
2.2
1.5
3.7
3.5
2.1
3.0
2.7
4.2
2008F 2009F
1.6
1.3
1.8
0.8
-0.1
1.4
2.3
0.7
1.0
0.7
2.5
41
0.1
0.2
0.2
0.2
-0.2
-0.2
1.0
0.5
-0.1
1.2
2.2
The U.S. twin (fiscal and trade) deficits continue to cause concern
U.S. Economy:
Still no end to financial turmoil
Real GDP growth to fall from 2.0% in 2007 to 1.6% or lower in 2008
42
43
45
An investment bank uses its propertiory book (own money) tom lend others
and invest, it started with the sub prime crisis banks like Lehman, buy
mortgage loans from the other bank, and then package them to sell bands
against the loan pool often they add cash to make the loan pool more
attractive so that the bonds can be sold at higher price. Suppose mortgage
was earning 6% these bonds are sold at 4%. The difference is the spread
which the invest bank earns by selling these structured banks it raises money
and frees capital. But when home buyers started defaulting these bonds lost
their value. It all began like this and then virus spreads across the markets al
over the world where India is one of the nation affected due to the giant
companies of the India invested in huge amount hence the problem persist.
(Source: anatomy of global financial crisis ET 17th Sept2008)
46
However there are still major issues around federal vs state bureaucracy,
corruption and tariffs that require addressing. Indias public debt is 58% of
GDP according to the CIA World Fact book, and this represents another
challenge.
During this period of stable growth, the performance of the
Indian service sector has been particularly significant. The growth rate of the
service sector was 11.18% in 2007 and now contributes 53% of GDP. The
industrial sector grew 10.63% in the same period and is now 29% of GDP.
Agriculture is 17% of the Indian economy.
Growth in the manufacturing sector has also complemented
the countrys excellent growth momentum. The growth rate of the
manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The
storage and communication sector also registered a significant growth rate of
16.64% in the same year.
Additional factors that have contributed to this robust
environment are sustained in investment and high savings rates. As far as the
percentage of gross capital formation in GDP is concerned, there has been a
significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year
2006. Further, the gross rate of savings as a proportion to GDP registered
solid growth from 23.5% to 34.8% for the same period.
47
GDP
Inflation
Consumers
Industrial
growth
Impact on Indian
economy
Banks
Employmen
t
B.O.P
Companies
49
Industrial production:
Falling crude oil prices and improvement in south west
monsoon will provide some relief to investors. Rising inflation remains a major
worry for the markets in the medium term.
The government will release June 2008 industrial production data at 12:00 IST
on 12 August 2008. Reserve Bank of Indias recipe to contain inflation by
increasing the lending rates is expected to hurt industry, manufacturing sector
and the overall growth momentum. Industrial production grew at the slowest
pace in more than six years in May 2008, at 3.8%, as against 10.6% in the
same month of 2007, with manufacturing showing signs of acute deceleration.
Inflation remains a major concern for the central bank. Inflation based on the
wholesale price index rose 12.01% in 12 months to 26 July 2008, slightly
above the previous weeks annual rise of 11.98%, government data released
on 7 August 2008 showed.
Reserve Bank of India (RBI) on 29 July 2008, raised repo rate by 50 basis
points to a seven-year high of 9% to curb inflation and dampen inflationary
expectations. RBI also raised the cash reserve ratio (CRR), the proportion of
funds that banks must keep on deposit with it, by 25 basis points to 9%. The
central bank left its reverse repo and bank rates unchanged. Responding to
the RBIs monetary tightening, top lenders HDFC and ICICI Bank and a
number of state run bank have raised interest rates.
The aggregate results of 2,988 companies showed 5.1% rise in net profit to Rs
63,752 crore on 37% rise in sales to Rs 7,64,023 crore in Q1 June 2008 over
Q1 June 2007. The net profit growth is now in single digits the lowest in the
past 20 quarters. In the June 2008 quarter, a number of companies were hit by
mark-to-market (MTM) losses on their foreign exchange (forex) exposure.
Crude oil prices have declined sharply from record high $147.27 a barrel hit on
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11 July 2008. Oil held near $118 a barrel on Friday 8 August 2008. India
imports 70% of its crude requirement. The rising crude oil prices affects the
fiscal deficit position of the country and its sovereign rating.
Market men will keenly watch the development of Indias nuclear deal with US.
The Board of Governor of the International Atomic Energy Agency (IAEA) on 1
August 2008 unanimously adopted the India-specific safeguards agreement, a
key step in operationalization of the Indo-US nuclear deal.
Foreign institutional investors (FII)s bought shares worth Rs 1,527.90 in the
first few days of August 2008 (till 7 August 2008). FIIs sold shares worth Rs
25,774.20 in the calendar year 2008, till 7 August 2008. Mutual funds sold
shares worth Rs286.10 in the month of August 2008 (till 7 August 2008).
Balance of Payments
Balance of Payments Anything that we buy or sell to the rest of the world must
be paid for. The current account (CA) tracks the flow of goods and services
between the US and the rest of the world and Net Exports of Goods and
Services, Net Income (from investments and wages) and Net transfers The
capital & financial account tracks the payments for those goods & services
(KFA) and records the purchase and sale of financial and non-financial assets.
It includes Official international transactions which central banks collect as
reserves.
Investors reaction
Most investments conversations in India obsessed about precisely picking the
bottom while this may be worthwhile past time for a few professional investors
for most others it exposes the exact opposite which is to say they remain
under invested when things began to work again. India never did shine as
brightly as people thought in 2006 nor is as dull as the people are thinking now
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the truth is in the middle and there is money to be had for the long term
investors in recognizing that.
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which have partnered this institution for business collaboration or funds would
have to be prepared for a change in the partners an even the stake sale by
distressed institution.
However that is not to say the collapse of the financial sector would make the
outlook for India and its market more gloomy their have been a few positive
developments over the past couple of weeks for instance the industrial
production for july 2008 looks healthier rising 7.1% over the same month last
year. In particular the robust growth of the capital goods sector [albeit over a
low basin July 2007]and consumer durable [perhaps in anticipation of the
festival season of demand] are definitely encouraging the decline in the global
commodity prices particularly crude oil now inching close q$90 a barrel should
spell good news for inflation control beside the first quarter GDP growth at
7.9% although slows in 3 years. Reflects that the fundamental of the economy
still varies from that should inspire confidence in the performance of our stock
market.
Stock market:
One often wonders why the Indian stock markets reacts more than the US
markets and an American financial institution goes burst. Close look at the
extreme volatility off course markets will lead to one to conclude that the
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Indian markets provides neither adequate liquidity nor value share efficiently.
The result is that the very purpose for which exchanges are constituted and
shares are listed is defeated low floating stock and low public share holding
result in extreme volatility forcing retail investors to shy away from the market.
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build long term capital account flows to minimize the risk from volatile short
term flows and to hedge risk on crude oil prices at appropriate levels to
address the said issues rupee exchange rates should remain attractive
through exporters should not give exchange rate benefits to short term foreign
investors and to reduce volatility in the oil import bill, gradual rupee
depreciation by 2-4% per annum will be in order and to undue the recent
damage rupee reversal (the mid point of 39 & 47) 43.00 should help the Indian
economy.
I would look forward that the rupee to settle in the range of 43-43.80 by march
2009 with the support of the RBI. Till the said core issues are addressed yes
as rupee appreciates to much to 39. Now it has depreciated too much at to 47.
mainly ion volatility in trade gap and capital account flows it is time for market
participants to move away from windfall gains and to focus on students risk
management practices to arrest the downside.
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The impact of recession is higher to small and medium sized (SMEs) enterprises
whose bottom lines get squeezed due to lack of spending by consumers
SMEs in the US are under severe pressure to increase profitability and business
margins to survive. This will force them to outsource and even have M&A
arrangements with Indian firms.
India is going to be a great beneficiary of this trend which will minimize the
impact of the US recession on Indian industry
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By March 2008, India had received SME outsourcing deals worth $7 billion from
the US as against $6.2 billion in the previous year
Good News.
Agriculture growth up
Two years of good monsoons
Rural growth to pick up
Govt. wages and salaries increase
Demograpic dividend continues
Basics unaffectedfood,FMCG,Education,Health
Prices under control
Communication
Simply
Timely
Accurately
Credibly
You must do X
You should do Y
You can do Z
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THE FUTURE
2008-2009
Probable worsening
2009-2010
Government current-stance..
Some reforms
Some announcements
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Fight pessimism
Financial inclusion
Domestic transport
Political consensus
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Conclusion
Arise, Awake and be Alert. Financial emergency has stepped in our country.
Sharp fall in revenue deficit as well as fiscal deficit stopped Government from
announcing further concessions. Do not expect much from RBI also. Those of
us who hoped for further sops from Budget are feeling dis-appointed. But this
is the time to stand on our own. Consolidate your position and be fully
prepared to face an even worse year 2009.Expect good times in 2010 only.
Merciless Professionalization, Outsourcing Marketing & HR functions,
Consolidation of Business and giving top most priority to Cash and Cash
Flow can only help in such situation of crisis.
We lead leadership in the era of economic uncertainty that credit is the oil
of the economic engine, and credit ultimately is a creation of confidence. Until
all players are confident about the intentions and strength of others,
There can only be stag nation. The economic peace of past generation is
over. We are in a war for survival,be set by fear uncertainty and doubt.
Conditions now demand for a seriously different kind of leadership. Leaders
must be prepared to make strategic, structural, financial and operational
changes in a hurry and with information that is at best incomplete.
themselves best to their environment. However Mr. Ram Charan, the noted
management guru opines that
It is not the strongest species that survive, nor the most intelligent, but the
one most responsive to changes.
The hope from Interim Budget has vanished. Door of Central Govt. is closed
for next few months till next government assumes office and is a stable
government. Developers are now looking to State governments for help.
Though the activity in sector is gearing up slightly The wait and watch
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hurting Indian real estate also by reducing the demand. The requirement for
office space, retail space, hospitality space and premium housing will get
reduced. Developers may not find good growth in these segments and
therefore should focus more on domestic demand like affordable housing and
infrastructure linked real estate development.
Banking sector were prompt in rescheduling the debts of developers but were
slow in loan disbursal to individual buyers.Buyers are also in wait and watch
mode and both banks & buyers are waiting for the developers to cut down
prices. However, nobody is sure that demand will pick up, if developers
reduce their prices. Nobody is sure about quantum of reduction of prices.
How much reduction will be sufficient is a guess. Reduction by individual
developer will definitely force other developers to bring down prices but it will
not end demand for further reduction. Only collective decision, based on
location, may work.
Right now there are only bad news. Sensex at lowest point in three years
while rupee touched historically lowest valuation. The stimulus package
announced by Government of India was more dependent on infrastructure
spending which has a long leg effect and may not show results soon. The
solution lies only in reviving domestic demand but, in such a scenario people
prefer to save rather than spend. FII operating in Asia Pacific region are
giving more weightage to China in comparison to India and are risk averse.
The silver lining, however, is that in India fundamentals are very strong.
Growing population, demographic dividend of having younger and educated
population, continuously rising urbanization will make Indian economy recover
faster than others. However, the strategy adopted by Sobha Developers and
is DLF is worth appreciating in such testing times and expected to bring more
cash flow.
Banks did not respond adequately. Unwillingness of Banks and
their risk-averse attitude towards aggressive lending is the greatest bottleneck
in spurring demand, which is at rock bottom presently. For aggregate demand
to boost, the interest rate environment has to change. For that to happen,
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Banks have to be shaken out of their present mindset. With overseas debt
market dried up, FII pulling out, primary market almost dead and
Governments on holidays, it is the aggressiveBank lending that can make the
difference.
BIBLIOGRAPHY
http://www.asia-pacific-action.org/node/210
www. Google.com
www. 4shared .com
Articles in times of India
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