Memory Lane

The expectations from Narendra Modi government were unusually high, considering the Prime Minister’s track record in Gujarat. The marketing of the ‘Modi’ brand by the BJP was well accepted by the masses, which also meant that expectations from this government reached the zenith at the time of elections. It would have been difficult for any government to achieve those expectations and therefore I would not judge the performance of this government in view of those expectations. A better benchmark to compare the performance of this government would be to the previous UPA regimes.

I believe this government has shown a lot of initiative in bringing structural changes, especially in areas of foreign direct investments (FDI), improving India’s business image by trying to improve the ease of doing business, clearing issues surrounding taxation & environment approvals and management of natural resources. The easing of FDI rules across 15 sectors a few months ago was a part of improving ease of doing business. The government has also been specifically working on removing the legal and regulatory bottlenecks that were affecting fresh investments, such as retrospective taxation, double taxation, lack of a single window clearance, etc. India’s ranking on the ease of doing business improved four places to 130th in the world and the government is targeting to bring India in the top 50. The Prime Minister has also done a terrific job in putting India on the world map during his international visits. Some of the reforms related to the allocation of natural resources have delivered excellent results. The efforts towards resolving the issues around the fuel supply issues have resulted in a huge reduction in coal imports. The auction of mines and telecom spectrum in a transparent fashion was a very important move to provide direction for future allocation of natural resources.

However, the government needs to show some resolve in pushing through some of the key reforms such as GST and land acquisition. A more accommodative stance towards the opposition to get these key bills passed should remain the focus of the current government. The Parliament which has not been functioning due to disruptions has been one of the major issues facing the Government.

The government has been talking about huge investments in infrastructure. Although, the pipeline of infrastructure projects announced is exciting, we are yet to see investment spending pick up from the government side significantly. From a market perspective, Government’s actions have done little to result in revival of earnings growth. However, a lot of macro factors have fallen in place. When this government came to power, both the twin deficits were ruling high. The current account deficit has almost been wiped out, while the government has not yet strayed from the path of fiscal consolidation. CPI inflation has fallen within the 6% RBI target as against 10%+ in the years preceding this government. The currency has been stable over the last year after depreciating sharply during the end of the UPA regime.

 Overall, this government’s performance has been quite commendable and some of the structural changes will take time to yield results. The interest rates have reduced by 125bp since January 2015 and we expect further cuts if inflation continues its downward trend. Also a lot of these cuts were not immediately transmitted by banks, which has delayed its positive impact on earnings. Interest rates would act as a major catalyst for earnings going forward. Again while we have not seen a significant pickup in the investment cycle, we continue to monitor infrastructure spending by the government, as it will be a key trigger towards driving earnings growth. Also some of the measures announced to further improve the ease of doing business such as the single business identification number (BIN) for companies will really reduce regulatory hassles for businesses, especially start-ups.

As per the proposal the permanent account number (PAN) is also being considered to act as the BIN, eliminating the need to get multiple registration numbers. I remain confident in this government’s ability to take the right measures to keep India high on the growth map. With the kind of structural measures we have seen so far, the government is laying the foundation for a structural growth map where earnings growth may be gradual, but more sustainable. Markets is going through a phase where it is adjusting to this reality and realigning its expectations. I believe markets continue to remain well poised for a strong long term bull run, with this correction offering a strong opportunity to investors.
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May 17, 2004: First Time trading was halted due to circuit break

 Almost 12 years back, on the 17th day of May in 2004, a political debacle led to trading halt in the Indian stock market causing much panic among the investors. While we celebrate our 30th anniversary in DSIJ, Madhur Dahale, Vice-President of Religare Securities travels down the memory lane and visits that fateful day. 

An unexpected defeat of NDA was well supported by SENSEX by melting the market with two lower circuit in a day. Sensex had given open/high of 5020.89 and started falling till the first lower circuit on 356 points down at 10:15 am. Market commenced after an hour halt, but panic selling forced the operators to stop the transactions within three minutes as Sensex tanked further to 4227 i.e. 842 points down. However panic selling  managed to force new government to interfere to avoid any further sell off. Market re-commenced in second half of trading session with assurance from Mr. Manmohan Singh on market friendly policies. The market had recovered 278 from the low of 4227 backed with the buying from financial institutions settling the markets at 4505. The S&P CNX Nifty too dropped 194 points or 12.46 per cent to close at 1388.75.

Days Summary

Open: 5020.89

High: 5020.89

Low : 4227.5

Close: 4505.16

This fall was caused because of two obvious reasons. The unexpected win of left supported government and global selling in emerging markets in the month of May.

Still the market regulators weren’t convinced on the above reasons and investigations was carried to find the real story to create selling  pressure to bring the prices down. After an year of study SEBI took action against Foreign Institutional Investor UBS, who were one of the largest seller of shares in May 2004.  UBS invest in India Stock Market through Participatory Notes(PN) on behalf of unidentified clients, many of them suspected to be Indians. Not only the selling pressure built-up to reduce the price of stock but the large amount of Indian money was circulated through routes reserved only for foreign investors. This confirmed the apprehension of large foreign money invested in Indian market were not actually foreign. During the course of the year-long investigation, SEBI sought the names of beneficiaries dealing on May 17, and the assurance that they are not Indians. UBS failed to provide satisfactory response. Later UBS was restricted to issue PN for a year and strict compliance check was carried to avoid further foul play.

The stocks reacted like this: 

ONGC plummeted 12.84% (Rs 93) to Rs 630. SBI also came under tremendous selling pressure tumbling to 13.18% (Rs 68) to Rs 447.

Private sector bank, HDFC Bank  shares fallen by 20.63% (Rs 74) to Rs 286. Hindalco (down Rs 24 or 2.66% to Rs 866), HDFC (down Rs 37 or 6.81% to Rs 504), Bharti (down Rs 8 or 5.81% to Rs 135) and ICICI Bank (down Rs 26 or 9.92% to Rs 239) ended with losses.

BHEL slumped 20.32% (Rs 102) to Rs 398, HPCL pared its losses on renewed buying to end 5% weaker (Rs 17) at Rs 315. PSU telecom major MTNL ended weak with a loss of 7.71% (Rs 9) at Rs 107.

Reliance Energy dipped 25.55% (Rs 164) to Rs 477. Tata Power fallen by 19% (Rs 62) to Rs 262, Tisco lost 9% (Rs 26) to Rs 263.

Market heavyweight Reliance dropped 15.35% (Rs 73) to Rs 404. Tobacco-major ITC crashed 9.46% (Rs 86) to Rs 828, HLL lost 15% (Rs 21) to Rs 120.

IT top pick Infosys plunged 10.92% (Rs 555) to Rs 4,527.  Wipro tanked 18.36% (Rs 284) to Rs 1,262, Satyam declined 5.95% (Rs 19) to Rs 293.

Textile major Grasim came off from its early lows to end 5.81% lower (Rs 63) at Rs 1,018. While L&T dipped 9.82% (Rs 50) to Rs 463, Gujarat Ambuja slumped 11.32% (Rs 35) to Rs 276. ACC was down 7.74% (Rs 21) at Rs 246.

Automobile major Bajaj lost 7.49% (Rs 68) to Rs 845. While Hero Honda dipped 8% (Rs 35) to Rs 407, Tata Motors shed 8.75% (Rs 36) to Rs 377.
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Impact of Fiscal Stimulus in Indian Scenario—an unprecedented situation

Head of Fundamental Research in Karvy Group, Jagannadham Thunuguntla, believes a well thought out spending package that focuses on building infrastructure is much needed to avoid such a past situation

The world economy, which had experienced significant slowdown since mid-2007 due to sub-prime crisis, experienced a jolt in September 2008 when the failure of Lehman Brothers led to widespread panic across global financial markets. Probably, this was the event of the decade. For that matter, this was probably the biggest event since the great depression of 1929.

The liquidity crisis that followed has not only affected developed markets but it also was quickly spread to emerging markets, including India. The unprecedented financial tsunami in the global financial markets has set off a vicious cycle of deleveraging, fast erosion of asset values, declining income, dwindling demand and mounting unemployment.

Due to crisis, the capital inflows in India declined sharply in 2008, resulting in sharp fall in the equity markets. Bank lending declined and credit spreads increased sharply due to the prevailing credit crunch in advanced economies. Also the country’s exports declined because of tighter trade credit, coupled with slumping export demand.

Reaction from Governments and Central Banks

Governments and central banks across the globe responded by various fiscal and monetary measures to deal with the crisis. Central banks adopted monetary measures, by reducing interest rates to unprecedented levels to support aggregate demand. In India, the RBI responded to the emergent situation by facilitating monetary expansion through decrease in the CRR, Repo and Reverse Repo rates, and the Statutory Liquidity Ratio (SLR).

But with the limited scope of monetary measures, the governments had to bring the fiscal stimulus. The Government of India had also launched fiscal stimulus packages to boost aggregate demand, in the form of pay rise for government servants, higher allocation for the National Rural Employment Guarantee Program, farm loan waiver and excise duty cut.

Even as large fiscal stimuli packages are being implemented around the world, there was debate in academic economist circles regarding the effectiveness of fiscal policy to counter falling aggregate demand. Additional domestic borrowing requirements of the central and state governments to provide fiscal stimulus had put pressure on the availability of funds for private loans (referred as “crowding out”) and hence on the interest rates. Hence, designing the fiscal stimulus plan to achieve the desired objective of stimulating economy and at the same time not compressing credit availability to private sector is the key.

The two main ways of providing fiscal stimulus are: Tax Cuts and Government Spending. The Indian Government launched fiscal stimulus packages between December2008 and February 2010. These stimulus packages are announced through different programs for the rural poor, the farm loan waiver package and payout following the Sixth Pay Commission report, all of which added to stimulating demand.

In Indian scenario, these fiscal stimulus measures necessitated a compensating widening of the fiscal deficit above the Fiscal Responsibility and Budget Management (FRBM) Act target levels. This got reflected in an increase of 20.2 per cent in government final consumption expenditure during 2008-09. All these measures have resulted in fiscal deficit for 2009-10 to reach 6.6 per cent of GDP, as against fiscal deficit target 3% as per FRBM. Due to these stimulus packages, fiscal deficit rose 24.89% in 2009-10 to Rs. 4,12,307 crores whereas in 2008-09, it stood at Rs. 3,30,114 crores.

All these stimulus packages ultimately helped in flow of money and increased business activity. This ultimately boosted the investors and corporate confidence which ultimately led to gradual recovery.

In the Indian scenario, the government had started gradually moving to rollback stimulus package in 2010. This approach is right in the sense that this rollback is quite gradual. The government should not roll back the fiscal stimulus early, as the benefits of fiscal stimulus may not get fully explored. So the government should gradually rollback the stimulus and move again to the path of fiscal consolidation. By 2014-15, the government could able to bring down fiscal deficit to 4%. Further, the government has pegged target of fiscal deficit at 3.9% for 2015-16, 3.5% for 2016-17 and propose to lower it to 3% by 2017-18.

Conclusion

The fiscal stimulus can be seen as one of the main reasons for stimulating demand and thus has brought revival in the world’s major economies. The experience of several crises management efforts in the world suggests that fiscal stimulus rather than fiscal righteousness has become the desirable policy option. However, it should be highlighted that uncontrolled expenditure on non-essential areas cannot serve as a meaningful fiscal stimulus. What is needed is a well thought out spending package that focuses on building infrastructure, and strengthening the desired areas such as education and health.
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ALGO TRADING: THE RISE OF ROBOTS

Wisdom Capital’s chief executive, Deb Mukherjee finds time for DSIJ and travels on a timemachine to talk about the future of trading in India.

“It is over. The trading that existed down the centuries has died. We have an electronic market today. It is the present. It is the future”.

Robert Greifeld, NASDAQ CEO, April 2011

INTRODUCTION

Automated trading or Algorithmic Trading is a computer trading program that automatically submits predefined trades to an exchange without any human intervention. To make your trades fully automated you must have an automated strategy that could be tasked to trade its own.  This very strategy will be having predefined buy/sell commands which can be then sent to the exchanges without much noise.

THE RISE OF ROBOTS

At present scenario, algorithms have become such a common feature in the trading atmosphere that it is unthinkable for an institution or broker to deny clients demand. These mathematical models analyze beyond manual trading styles or even beyond human mind.  Every quote and trade of algos in the stock market, identify liquidity opportunities, and turn the information into intelligent trading decisions. Algorithmic trading, or computer-directed trading, cuts down transaction costs and allows traders/investors to take control of their own trading processes. It is a style of trading and not a separate business.

Algorithms have become a must-have for brokers seeking to gain new business and retain their current clientele. Trade carried out using algorithms is known as algorithmic trading. Algorithmic trading can be defined as “placing a buy or sell order of a defined quantity into a quantitative model that automatically generates the timing of orders and the size of orders based on goals specified by the parameters and constraints of the algorithm”.

Some trading platforms have strategy building "wizards" that allow users to make selections from a list of commonly available technical analysis tools or indicators or systems to build a set of rules that can then be automatically traded. Many traders, however, choose to program their own custom indicators and strategies or work closely with a programmer to develop the system. While this typically requires more effort than using the platform's wizard, it allows a much greater degree of flexibility and the results can be more rewarding.

PROS & CONS OF ALGO TRADING: Algo-trading provides the following benefits:

Instant and accurate trade order placement.

Trades executed at the best possible prices & Trades timed correctly and instantly thus, significant price changes can be avoided.

Reduced transaction costs.

Backtest the algorithm, based on available historical and real time data

Reduced risk of manual errors in placing the trades

And finally preserving emotions.

Disadvantages&Realities:

The theory behind automated trading makes it simple: set up the software, program the rules and watch it trade. In reality, however, automated trading is a sophisticated method of trading, yet not infallible. There could also be a discrepancy between the "theoretical trades" generated by the strategy and the order entry platform component that turns them into real trades.

Monitoring. Although it would be great to turn on the computer and leave for the day, automated trading systems do require monitoring.

Over-optimization.  Traders sometimes incorrectly assume that a trading plan should have close to 100% profitable trades or should never experience a drawdown to be a viable plan. As such, parameters can be adjusted to create a "near perfect" plan – that completely fails as soon as it is applied to a live market.

Wisdom Capital OffersAlgos:

At Wisdom Capital most of the arbitrage and hedging is executed now-a-days by using algo trading.Inter exchange arbitrage has become easier by using algo trading.In algo trading spreads between 2/3 legs are fed in the Algo server and the algo server itself places orders at that spread to the exchange. In high frequency. Trading (HFT) fastest ever jobbing is possible through Algo trading.

Some of the popular strategies used in Equity Derivatives are narrated below.

1. Stradles / Strangles

2. Bull spread and Bear spread

3. Butterfly – Long & Short

4. Box Strategy

5. Conversion & Reversion

6. Call & Put Condor

7. Iron Butterfly

8. IV Strategy

9. Calender Spread

10.  Technical Based Algo Trading

Algo Traders do arbitrage using various types of Greeks i.e.

Delta, Gamma, Theta and Vega.

CONCLUSION:

Although appealing for a variety of factors, automated trading systems should not be considered a substitute for carefully executed trading. Mechanical failures can happen, and as such, these systems do require monitoring. Server-based platforms may provide a solution for traders wishing to minimize the risks of mechanical failures.
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Start and end of quantitative easing: The era of unconventional monetary policy

Sundaram Kalidas, professor of finance in University of Pune revisits global quantitative easing events for DSIJ readers in this exclusive article.

Money makes the world go round. In a global economy, problems are contagious. The rich give money to the poor so that the poor can keep buying from the rich. The hope is that the poor overcome their problems, repay loans, grow and become rich enough to keep buying. The money flows are engineered by the global central banks. They take it upon themselves to keep the growth engine chugging along. The natural fall out is that the Central Banks of the Big nations use monetary policies to achievethis end.

The simple logic is that increasing money supply increases demand for goods and services and thus, monetary supply can be used to influence demand/supply across various geographies. In this race, each Central Banker does what they think is best for their own country. However, money is porous and seeps across geographies. Not necessarily through trade. Large flows of capital chase financial assets across the globe. Thus, the series of Quantitative Easing (QE) have found their way to global capital markets. However, this flow of funds has not been backed by growth in economies. Money supply has grown much faster, resulting in creating bubbles across asset prices. Easy money has blinded the world to risk in the financial assets

Global economic activity gets impacted by the state of the largest economies eg. China, US, Europe, Japan. This impacts the emerging economies as can be seen presently. The famed BRICS nations are struggling except for India probably.

In 2008, global economic crisis hit all nations the US started supporting some of the biggest defaulters, who had thrown basic financial prudence to the winds, through quantitative easing. This resulted in other economies also adopting this mechanism at various periods in time. However, the result is that global economies are once again facing the threat of a breakdown. “Make no mistake; a big part of why the haves are increasingly better off than the have-nots in America is Fed policy. By inflating the value of the assets most likely to be concentrated in the hands of the rich, you are deliberately exacerbating income inequality. Or, as Hank Paulson put it: “we made it wider!”-Zerohedge.com

The US has been instrumental to a large extent in driving growth through consumption but in recent times after the 2008 crisis the Americans have learnt the importance of saving.

Has the 2008 crisis really been resolved? The answer is NO. Central Banks have lost mechanisms to stop the spiral fall in markets and public confidence. Japan has pushed rates into the negative, ECB has pushed rates into the negative and the US Federal Reserve Chair Janet Yellen essentially told the world things aren't going the way she wants them to go in the U.S., and even though there are legal and technical problems with the Fed taking rates into negative territory, they've thought about it. She might as well have told markets, "I'm sorry, we're out of ammunition to support the equity bubble we engineered, but we'll try negative rates if we have to."

Post the crisis, central bankers are finding that their models are not working to plan.Problems still exist and have not been fixed. Statistics are proving time and again that measures are all short term defined as maybe a month.  

This too much money phenomena started in 1971 when the US abandoned the gold standard and gave them the right to print currency without any control. While the rest of the world is fighting inflation (exported by US) the US has lost the battle.

“In the past, aggressive easing of monetary policy provided the solution to almost all recent crises – both those which did not lead to recessions, such as 1998 and 2011, and those which did, such as the tech bubble of 2000 and the real estate bubble of 2007-8. At this point we may start to question whether it can provide a similar solution this time round, not just because of the zero lower bound, but because the entire premise on which it has been based – inducing credit expansion and risk-taking in some other part of the global economy – seems to be reaching its limits.” Matt King.
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Stock market crash of 2006—the day of extreme volatility in the markets

Way back in 2006, around 10 years back, Sensex shredded 1111 points causing much annoyance and anxiety among investors in the Indian stock markets. Avnish Kumar, market expert and Director of AmrapaliAadya revisits the day and shares his experience with DSIJ readers.

Plot: Indian stock market experienced their biggest intra-day fall on May 22, 2006, with the BSE Sensex sliding by 1111.70 points. The event was named as black Monday of 2006.Trading was suspended for an hour due to the sharp fall (the index-based circuit breakers came into play).

The market crisis coincided with the second anniversary of the UPA- Igovernment, whose ascent to power was similarly accompanied by nervous selling and a price slump and reversed within days. Since then, the Sensex has crossed new milestones of successive thousands with increasing frequency.

The stock market witnessed an unprecedented bull run since the UPA government came into office. From 4759 at the end of May 2015 it had reached a high of 12042 in the end of April 2006, a move of more than 250 percent. This abnormal price appreciation was a bubble that kept growing with government claims of strong fundamentals of the economy.

GDP growth was 8.3% at the end of July quarter of 2004 and falls to 5.5 in Jan quarter of 2005. On the same period, Sensex climbed 25% to 6500. After two quarter of dull GDP growth, momentum picked up under the incumbent UPA government to the level where previous government has left it. From April quarter 2005 onwards, India’s economy grew at a sustainable rate of nearly 9 per cent. But GDP growth of 8.3 % to 9.5 % average growth during 2005 – 2006 no way was suggesting huge fundamental change that leads to 250 per cent growth in indices.

With government claimed of strong fundamental of the economy, it came to the rescue of the then Finance Minister suggesting investors should not panic and stay invested. On the same time state owned financial institutions were asked to buy heavily in the stock markets.

On the same day itself markets recovered from lows and ended with a loss of nearly 4 per cent and in the successive months it climbed higher and at the end of the year 2006 Sensex closes at 14000.

Global & Domestic worry: The day's slump in the market came on top of a sharp fall recorded in tune with the trends in the world's gold, metals and stock markets.

Apart from global trends impacting India's capital market, which was opened in 1991 to the flow of foreign institutional funds in an increasingly integrating world economy, a circular issued by the Central Board of Direct Taxes with possible implications on taxation of market players, domestic or foreign, caused the stock plunge.

Market fall was coincided with a depreciation in rupee where the currency depreciated to nearly 2 percent on the month of May till the slump day.

Attempt to taxing foreign investors by the government was seen as a capital flight as selling by FII intensified caused a market meltdown.

FIIs were also behind the market crash of ‘Black Monday' (17th May 2004), when the Sensex had fallen by 565 points. Enquiry into the crash revealed that the instrument of Participatory Notes (PN) [which are like contract notes issued by the FIIs to overseas clients who are otherwise not eligible for investing in India] was misused by the FIIs.

Impact of the fall: Market fallout continued over a period of time with the FIIs pulling out of the market progressively. A secular depreciation of the rupee, coupled with rise in international oil prices, was bound to cause inflationary pressures in the economy and hit the common man hard. 

The fallout impacted the corporate fund raising where corporate valuation comes under the pressure and investor were reluctant to buy growth stories including good growth stories.
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Fall of Lehman Brothers: Culmination of Subprime crisis

Samrat Dasgupta, CEO of Esquire Capital Advisors Pvt. Ltd. in this exclusive written for DSIJtravels back to the days of subprime crisis and refreshes the memories of our reader-investors

On September 15, 2008, Lehman Brothers made the largest bankruptcy filing in history. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. Lehman's demise also made it the largest victim, of the U.S. subprime mortgage-induced financial crisis that swept through global financial markets in 2008. Lehman's collapse was a seminal event that greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008, the biggest monthly decline on record at the time.

The Prime Culprit

In 2003 and 2004, with the U.S. housing boom (read, bubble) well under way, Lehman acquired five mortgage lenders. Lehman's acquisitions at first seemed prescient; record revenues from Lehman's real estate businesses enabled revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other businesses in investment banking or asset management. The firm securitized $146 billion of mortgages in 2006, a 10% increase from 2005. Lehman reported record profits every year from 2005 to 2007. In 2007, the firm reported net income of a record $4.2 billion on revenue of $19.3 billion.

Lehman's Colossal Miscalculation

In February 2007, Lehman had a market capitalization of close to $60 billion. However, by the first quarter of 2007, cracks in the U.S. housing market were already becoming apparent as defaults on subprime mortgages rose to a seven-year high. In the post-earnings conference call after the 2007 first quarter results, Lehman's chief financial officer (CFO) said that the risks posed by rising home delinquencies were well contained and would have little impact on the firm's earnings. He also said that he did not foresee problems in the subprime market spreading to the rest of the housing market or hurting the U.S. economy.

The Beginning of the End

As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds, Lehman's stock fell sharply. During that month, the company eliminated 2,500 mortgage-related jobs and shut down some of its mortgage units. Even as the correction in the U.S. housing market gained momentum, Lehman continued to be a major player in the mortgage market. In 2007, Lehman underwrote more mortgage-backed securities than any other firm, accumulating an $85-billion portfolio, or four times its shareholders' equity. In the fourth quarter of 2007, Lehman's stock rebounded, as global equity markets reached new highs and prices for fixed-income assets staged a temporary rebound. However, the firm did not take the opportunity to trim its massive mortgage portfolio, which in retrospect, would turn out to be its last chance.

Hurtling Toward Failure

Lehman's high degree of leverage - the ratio of total assets to shareholders equity - was 31 in 2007, and its huge portfolio of mortgage securities made it increasingly vulnerable to deteriorating market conditions. Lehman announced a second-quarter loss of $2.8 billion, its first loss since being spun off by American Express, and reported that it had raised another $6 billion from investors. The firm also reduced its exposure to residential and commercial mortgages by 20%, and cut down leverage to about 25.

Too Little, Too Late

However, these measures were perceived as being too little, too late. Over the summer, Lehman's management made unsuccessful overtures to a number of potential partners. The stock plunged 77% in the first week of September 2008, amid plummeting equity markets worldwide, as investors questioned CEO Richard Fuld's plan to keep the firm independent by selling part of its asset management unit and spinning off commercial real estate assets. Hopes that the Korea Development Bank would take a stake in Lehman were dashed, as the state-owned South Korean bank put talks on hold.

The news was a deathblow to Lehman. The company's hedge fund clients began pulling out, while its short-term creditors cut credit lines. Lehman announced a dismal third-quarter loss of $3.9 billion, including a write-down of $5.6 billion, and also announced a sweeping strategic restructuring of its businesses. The same day, Moody's Investor Service announced that it was reviewing Lehman's credit ratings, and also said that Lehman would have to sell a majority stake to a strategic partner in order to avoid a rating downgrade.

With only $1 billion left in cash by the end of that week, Lehman was quickly running out of time. Last-ditch efforts over the weekend of September 13 between Lehman, Barclays PLC and Bank of America, aimed at facilitating a takeover of Lehman, were unsuccessful. On Monday September 15, Lehman declared bankruptcy.

Conclusion

Lehman's collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. Many questioned the U.S. government's decision to let Lehman fail, as compared to its tacit support for Bear Stearns (which was acquired by JPMorgan Chase) in March 2008. Lehman's bankruptcy led to more than $46 billion of its market value being wiped out. Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America in an emergency deal that was also announced on September 15. The U.S. government later intervened to prevent a number of large banks from failing and thus managed to stop the crisis from spreading.
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The Great Commodity Crash--it still hurts

DSIJ's Lohit Bharambe revisits the commodity crash moments as it had kicked off way back in 2014.  He believes, the global equity markets are responding adversely and are in a volatile situation because of commodity crash experienced all over the world.

The world started witnessing a commodity crash from the end of year 2014 and till date it is a burning issue. The effect of the great commodity crash was harsher due to global turmoil of crude oil prices, which tumbled down from their all time highs of around USD 114 to about USD 25 in recent days.

India, world’s fourth largest importer accounts for almost 80 per cent of the oil share. The timing was worse for India during year 2013 due to Syria. The effect started way back in the year 2013 as investors were unsettled due to the threat of a military strike against Syria by western powers, after the conclusion of which the regime used chemical weapons against civilians, resulting in the soaring of oil prices.

One of the reasons for extreme fall of crude is supply glut across the globe. The meeting is the latest effort by some members of the Organization of Petroleum Exporting Countries to join with non-OPEC producers in curtailing output. Over the decade low crude oil prices will be pushed a little depending upon agreement to cut down production of crude.

The crude oil is not the only commodity that has tumbled. The copper prices dropped almost 38 per cent and iron ore prices also fell about 63 per cent from year 2011 highs. The Chinese eonomy is spreading negative waves across the world. The Chinese are dumping commodities to the world, and overcapacity in the country leads to fall in prices of commodities. As an effect of the import from China the prices of steel are also dropping and there is growing concern for  India’s metal sector. The price of Copper is also persuing declining trend over the past three years.  Considering the capital expenditure of metal companies, it stands at almost one fourth of capex of corporate India. The commodity crash is hitting hard on metal companies and they may not expand their capacities in future.

The Indian banking sector is experiencing bad loans situation during the last one year. Majority of the non performing assets are from the metal sector, which banks are declaring as bad loans in the quarterly results.

The precious metals are also not shining from the recent past. The prices of gold and silver are also hovering at multi year lows and now trading at about Rs 37000 and 28600 on MCX (multi commodity index). The prices have been declining in global as well as domestic markets.  On February, 15 the government hiked import duty on gold and silver which may impact the country’s current account deficit.

The agro commodities are also bleeding in India, as last two monsoon seasons were below expectation. The global commodity markets are behaving in an abnormal way and we envisage a downward trend in the future. According to the Niti Ayog, the farm sector crisis of the country may intensify to lower levels in 2016-17.

There are many commodity exporters, who are seeing large reductions in their exchange rates, and inflation is ever increasing. As an effect, there will be short-term costs for consumers, and this could boost the competitiveness of other sectors like agriculture or manufacturing.

Gasoline prices are decreasing along with declining commodity prices. The governments are not giving subsidies on gasoline. The countries like Indonesia are already taking the opportunity to roll subsidies back from the long term perspective for public finance and are more targeted towards social programs.

The global equity markets are responding adversely and are in a volatile situation because of commodity crash experienced all over the world. There is a linkage between commodities and emerging markets which usually are well correlated. The lowering commodity prices will impact the fiscal deficit slightly negatively but will not have the harmful effect that it is having on rest of the economy. 

The sectors impacted because of commodity crash are oil and gas. The exploration oriented companies results are worsening and stock prices of such companies have also dropped during the last one year. The oil & gas index has fallen about 17 per cent in one year duration. Another sector which contracted the investors wealth is the metal sector. The metal index has decreased by almost 37 per cent in last one year. The traffic of ships across the ports is declining over the commodity crash turmoil. The port business has been reduced because of lower commodity trade. The shipping companies are also witnessing downward trend in last one year.

On the other hand aviation sector witnessed cheerful sentiments as 60 to 70 per cent of total expenditure is fuel oil. The investor’s investment has increased in aviation companies during the last one year.
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Why did the rupee crash then in 2013?

Abhishek Kumar of DSIJ look through the days of rupee crash and the journey thereafter. In 2013, India’s rupee plummeted the most in two decades to a record low as a surge in oil prices threatened to worsen the current account and pushed the economy toward its biggest crisis since 1991. 

The mighty fall occurred when Brazilian economy is mired in protests, China’s growth is slowing and Russia is addicted to self-destructive spy games. In the period of two years before 2013 the rupee depreciated by 44 per cent and hit a record low against the US dollar. The stock market was plunging, bond yields were nudging 10 per cent and capital is flooding out of the country.  Due to depreciating rupee the IT index surged more than 51 per cent in the period.  The repercussion of this dramatic fall of Rupee against the basket of major currencies can be explained as follows: 

Firstly, India’s growth fell to 4.4 per cent in the June 2013 quarter and current account deficit was too high with rout in emerging markets hitting the rupee hard. India's current account deficit has exploded 1125 per cent since 2007, going from $8 billion to $90 billion. In other words, India is importing USD 90 billion more than it is exporting, adding to that India's foreign exchange reserves were around USD 275 billion covering current account deficit only 3 times.

Second, a way to measure the health of a current account deficit is to compare it to the country's gross domestic product (GDP). Academic studies suggest that a current account deficit which is 2.5 per cent of a country's GDP is sustainable. What made India's situation dangerous is that it was at almost 5 per cent of its GDP. Furthermore, economists polled around the world were expecting India's GDP to drop even further.

The government in 2013 passed a bill to provide cheaper food grain to the poor, which increased the spending about Rs 1.25 trillion (USD 18.3 billion) in subsidies each year, potentially worsening the fiscal gap. Further the authorities were ruling out the recapitalisation of India’s banks as a measure to restore confidence. Public-sector lenders that dominate the banking industry were still having dodgy loans of 10-12 per cent of the total. Almost 20 per cent of infrastructure loans are in trouble. Till now the problem with PSU banks related to cost of recapitalising increased further due to increase in non-performing assets of banks. 

In order to avoid the crisis similar to 1991, policymakers in India responded with a series of measures designed to support the rupee, including limits on the import of gold, oil and other key commodities. At the time government made another controversial move to restrict the amount of money Indian citizens can take out of the country, and similar restraints were placed on outgoing corporate investments. At the same time, credit-default swaps insuring the debt of State Bank of India, considered a proxy for the sovereign, against non-payment, climbed 111 basis points to 371. 

On supply side also there was tension going on as the US economy, 5 years post the 2008 financial crisis, started to make an economic emergence. When a country's economy is growing, interest rates start to go up, and the country starts printing less money than required. So India was considered to be in dangerous situation, where, not only is the rupee depreciating heavily against the dollar, but the supply of dollars was likely to shrink. We emphasized the need for US dollars in order to keep the current account deficit in check. This puts an additional burden on the rupee.

Furthermore, two additional factors played part here. Firstly, the push in interest rates in the United States and overseas creates higher incentives for international investors to invest abroad versus India. The impact of this is being felt since March 2013 to October 2013, when foreign exchange reserves dropped by USD 14 billion, as investors opted to invest in the US and other countries versus India. 

When India’s growth forecasts were falling, other markets were becoming more attractive. A few years before that, investors were frustrated with the slow recoveries in established markets, and might have taken a risk in India. But in 2013 in the backdrop of somewhat greater stability, investors are returning to the advanced economies to hunt for bargains and ride the cresting wave. Not surprisingly, credit is tougher to come by in India; the yield on its government bonds has hit a five-year high.