Indian Financial Markets

Despite vanishing FIIs, the Indian markets remain resilient and staying afloat .The US
crisis has significantly affected the investor’s sentiments. There will be substantial capital
out flows owing to investor’s tendency to with-draw from risky markets. This would lead
to liquidity crunch that will, in turn, put pressure on the Indian bourse.

Currently the Indian economy is reeling under high inflation and a moderate growth rate.
The Indian economy continues to show good health because of the strength of its
domestic drivers, like infrastructure projects, SME sector exports and good yielding from
agriculture sector. India is now in a position to supply the food grains to U.S.A.

The siphoning of funds by FII is restricted in India by the SEBI regulations from 2008
January on wards, helped India to stay afloat in this stock market crisis. The FIIs usually
play their game through Participatory notes (P notes) when ever they feel the Indian
markets are risky they with in no time with draw huge quantities of funds from Indian
stock markets and it effects the debacle of Bourses and causes panic among the
Domestive investors .

The globalization of stock markets & financial markets has the retrospective effect on the
markets from Tokyo to Newark with in a span of 24 hours. But once risk aversion
subsides, foreign funds would re-enter India. This would depend on how soon the
domestic market fundamentals regain momentum.

Ever since the US investment banking gaint “Lehman Brothers filed for bankruptcy,
there has been a considerable out flow of FIIs money from Indian stock markets. On
September 15, the out flow stood at Rs. 856.4 crore. It further increased to Rs 1,333.5
crore on September 18, sensex lost 470 points and Nifty shed 155 points on the day of
Lehman filed for Bankruptcy . The Bank index dipped 3.3 percent, Realty index lost 7.65
percent, and IT index closed 5.5 down on the same day.

The cause behind US economy debacle is, the US investment banks are extremely over-
leveraged and solely dependent on whole sale finances. This led to their demise. But such
is not the case with Indian Banks. The common man’s deposits are more in India and they
have the trust on the Banks, because all most all the Banks are nationalized and the
depositor’s interest is highly protected by Government of India.

But where as in US the investment Banks are dependent on institutional investor’s funds.
These investments are highly volatile and always search for high returns on their deposits
and their way of depositing is Demand based and not Time based. That means when ever
they feel the return on their investments are dipping with in no time, with draw funds
from such markets and re-invest in Better markets or take defensive positions, until the
markets regains its strength.
The Lehman brother’s debacle was raised from “SUBPRIME” episode at US. The sub
prime caused great loss to US economy in the previous year and the bad effects of
SUBPRIME showed their impact now on the Investment baking in US.

The US Government knows it before hand and predicted the collapse of markets in near
future by SUBPRIME. The US senate had a plan of buy-outs &Bail-outs in the time of
crises to stabilize the US economy. The stunt, in the US senate about Bailout of the
Lehman Brothers and other institutional investing Banks was already rehearsed and well
played on the stage.

All the investors through out the world viewed this spectacular thriller with hair rising.
The US senate under the leader ship of George Bush put an end to the financial crisis
since the great depression of 1929.

Predictably, India like any other country is experiencing the repercussions of financial
mess in the world largest economy. The Reserve Bank of Indian came with a package of
Rs.20, 000 crore to Bailout Indian financial institutions and strengthen the stock market
sentiments.

All the Domestic markets around the world will remain under pressure till the details of
the $800 billion Bail out program announced by the US government come out. The bank
rupee of Lehman Brothers has brought an end to the exclusive investment Banking era.
Now it is the time for an integration of commercial and investment Banking.

Market men said signs of uncertainty on the domestic political front, coupled with fears
of US recession becoming a reality, took a severe toll on the bourses. They further said
that foreign institutional investors continued their selling spree in view of the bleak
picture in the global financial markets. Brokers said less than expected corporate earnings
also contributed to the fall in sensex. They said efforts by the government and the reserve
bank of India to ease money supply in the system had had no impact on investor
sentiments

By and large, India has been spared the panic that followed the collapse of banking
institutions, such as Forties in Europe, and Merrill Lynch, Lehman Brothers and
Washington Mutual in the US.

The relative freedom from the contagion spreading from the global tsunami on the Indian
financial system owes much to the wise and judicious policies of our central bank and the
Government of India.

The answer lies in the wise regulations and meticulous supervision by RBI. The RBI
enforced strict capital adequacy requirements and if any financial institutions or banks
exceeded the specified limits of exposure to stock markets, it would have to provide more
capital. This effectively insulated the banks and financial institutions from volatility of
the bourses. Enforcement of the above instructions has paid good dividends. Erosion of
capital of the banks and financial institutions has been reduced. These exposure limits,
however, deserve to be reviewed from time to time.

There is another observation, which has to be kept in mind in judging the relative
freedom of Indian banking system from the catastrophic mess in the US. This is based on
the important fact that the Indian banking sstem is basically owned by the public sector.
The state ownes many of the banks and financial institutions in the country.

One thing we debate on the degree of government involvement in the capital markets,
because government is going to spend the taxpayer’s money to stabilize on Bailout the
stock markets. The stock market is just like a gamblers casino played by the speculators.

The Government receiving revenues from the stock market operations. It created a Bully
called SEBI to restrict and regulate the markets. The Government of India it self
promoted NSE. India is the first country to adopt digitalized computer networks for
establishing the stock market business though out India by allotting online sub-brokers.
Where as still US is following “out cry “method for purchasing and selling the stocks.

The NSE Advertising suggests to the house wives, that stock markets are just like home
kitchens and you can cook a delicious meal with all the ingredients available at the
kitchen.

The Government of India prohibited all the horse races, money lotteries, casinos and
other waging activities in India. The stock markets come under exact definitions of
waging activities, even though GOI promoting and regulating the stock markets through
SEBI. For the time immemorial the Indian economy solely depend on Agriculture exports
& Hand loom exports. The GOI should take effective action program to promote the
enterpremual skills among the Indian youth than investing at stock markets. For
strengthening of Indian economy, the GOI should emphasize on long term benefits rather
than short term profits.

For effective utilization of Indian Youth, the GOI can promote various programs to
encourage the SMEs with easy credit facilities and educate them with industrial training
to start venture and promote healthier markets to export. It should extend all the support
in developing the growth of SMEs.

If huge investments diverted to fundamentally strong sectors like manufacturing and

services, the Indian economy cannot be rattled by any stock market debacle in the future.
We should be in position to protect our economy by growing self sufficient in all aspects.