Impact of Global Financial Crisis on India

Impact of Global Financial Crisis on India –

Since 1991 following the policy of globalisation, the Indian economy was also opened to foreign capital and trade of goods and services, and integrated with the United States and European countries to a greater degree than ever before. Therefore, when financial crisis hit the United States and European countries, India was also affected by this.

Stock Market Crash –

Following the financial crisis of the United States and European countries, Indian stock market also suffered. To meet the liquidity requirements of their parent companies, Foreign Institutions Investors (FIIs) started selling the shares of the Indian companies held by them. The selling pressure by the FIIs brought about a crash in Indian Stock Market (Bombay Stock Exchange – BSE).

In last few years FIIs had invested on a large scale in the equity shares of several Indian companies operating in various industries from consumer goods to infrastructure industries. As a result of the aggressive buying of shares of Indian companies by FIIs, share prices rose to new high levels. The Sensex which was around 6000 in 2004 rose to 8000 in August – September 2005 and went on rising, crossing 10,000 mark in 2006, 13,000 mark in 2007 and reached its peak of around 21,000 mark in January 2008.

At this time, share prices in the US and European markets started falling sharply and caused the problems of liquidity and credit crunch. This led FIIs to sell shares held by them in the Indian stock market to pull out capital from India. This was done to rescue their parent companies who were facing liquidity problem.

As a result of selling pressure, Sensex of Bombay Stock Exchange started tumbling, it fell from 21,000 in January 2008 to 11,000 in September 2008 and it below 10,000 in October 2008 and 9000 mark in November 2008, that is, 60% fall since January 2008.

This caused huge losses to the Indian companies and investors whose huge wealth wiped out in a couple of months in 2008. Foreign Institutional Investors sold more than $13 Billion worth of shares of Indian companies up to November 2008. This also led to the decline in foreign exchange reserves held by RBI to $250 Billion by the end of 2008.

Depreciation of Indian Rupee –

The effects of capital outflow by FIIs was not confined to drastic fall in share prices but was more deeper and devastating. When FIIs sold their shares in the India they got rupees. They had to convert their rupees into dollars to send them abroad. This led to the increase in the demand for dollars. Rupee-Dollar exchange rates being determined by demand for and supply of currencies, the increase in the demand for dollars caused appreciation of the US dollar in terms of rupees (depreciation of rupee in terms of US dollars).

The Indian importers also demanded dollars to pay for the imports of goods. The Indian banks doing foreign exchange operations also brought US dollars at home to keep their foreign exchange operations afloat since due to credit crunch none of foreign countries was willing to lend dollars to Indian banks. This further raised the demand for dollars causing fast depreciation of rupee in the months of September, October and November 2008. The Indian rupee whose value had appreciated to Rs. 39.4 for a dollar in December 2007 depreciated to Rs. 49.3 for a dollar in October 2008 and further to all time low of Rs. 50.6 for a dollar in November 2008.

This depreciation in rupee made exports cheaper and imports costlier. In October – November 2008, crude oil prices declined from all time high of $147 per barrel to around $50 in November 2008 and to $40 in February 2009.

Liquidity Crunch in the Indian Banking Sector –

Impact on Indian Economic Growth –

Exports and Balance of Payments –