Moment of truth, People! Be prepared for some hard facts about the global economy’s changing gears. Difficulty is just another face of opportunity, I believe! In the first part, we looked at the factors that led to the subprime crisis, and in this part we look at the preventive measures that are so far taken. Industry reactions in America, Germany, India, and predictions for the next year.
With substantial loan foreclosures and toxic assets, the worst hit institution in America are the banks that supply the fuel (money) to ensure safe run of the economy. American government has recently declared a record-breaking bail-out package worth $700 Billion to the banks involved into subprime lending. Europe isn’t far way! Germany has declared a package of 25 Billion Euros, Switzerland is following the suit, too. Britain is raising 20 Billion pounds from the government and investors.
However hard Indian banks deny the damage, they have indirectly hinted at cutting RBI’s (Reserve Bank of India) lending rate to save them. The banking sector in India is very well regulated and do not practice subprime lending, but the funds soared mainly because of two things, FDI volume (Foreign Direct Investments) that shrunk and the market panic. Listening to the bank’s plea, the repo rate (as it is referred to) has been reduced by RBI from 9% in August to current 7.75%. We hope that it would maintain a healthy liquidity in the market!
Experts say that so far the industry was in the denial mode, but 2009 will not be that easy. Automotive industry, the key economic contributor has faced severe damages in the mayhem. Adding to the woes are manufacturing and commodity markets. Factors contributing to it are lesser consumer spendings and cash-strapped banks. Indian industry, too has so far been reluctant, even though the current crisis has affected most of the blue chip companies. Realty industry is by far the worst hit, partly also due to high interest rates around 12% on the home loans. IT companies have started to feel the heat, but are bullish on their growth plans next year.
The story is not over yet! There are a few solutions to avoid the spiraling financial disaster. Many experts are bent on increased government intervention. This time with its own pet, the Public Sector Units, PSU. American government has already acquired significant shares in ailing banks. Europe is imitating as well. In India, PSUs play important role in driving the country’s economy and expected to do so in this turbulent time. But if the government starts spending/expanding extravagantly with PSUs, then there is a risk of inflation going sky-high due to depreciation of currency.
It is surely a hard time, but that is how new ideas come into existence! The government has to play a vital role in bailing us out, but cleverly. With Obama as the new American president, a change in economic policies is forseeable. Germany and India will also go in elections next year. Can we expect a change there??? Wait and watch!!!
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@Welcome gundappa
Can you tell me who did your layout? I’ve been looking for one kind of like yours. Thank you.
Rightly put Amol, FM has too cautioned the market but was sly, while some world financial analysts have said the hiccup was just due to rise of the Tsunami, its yet to hit the coast !
The article depicts the facts of the current market situation in a really simplified way. Lets and wait and watch how far would the ‘change’ contribute in improving the current economic situation.
Thanks Kedar for the wonderful remark! Infrastructure sector is worth watching for, it will pay off later….