Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

India is now in September 2007

In terms of the financial crisis in India, I believe we are where
the US and Europe were in August/September 2007. This is how the comparative
chronology stacks up.

US and Europe: August/September 2007 India: October 2008
August 9/10, 2007. Liquidity
strains in the money market becomes acute. ECB injects liquidity of
€ 95 billion. Fed injects $ 38 billion.
October 10, 2008. Liquidity
strains in the money market become acute. RBI injects liquidity of Rs
600 billion by cutting the cash reserve ratio (CRR).
September 18, 2007. Fed cuts Fed
funds target by 50 basis points (0.5%). It also cuts discount rate by
100 basis points (1%) including a cut a month earlier.
October 20, 2008. RBI cuts repo
rate by 100 basis points (1%).
Q3 2007. Real estate prices (Case
Shiller index) after peaking in the second quarter of 2006 has been
declining for five quarters but has fallen by only 5% from the
October 2008. Real estate prices
in India probably peaked in late 2006 or early 2007 and has also been
declining unofficially for several quarters, but the sticker price has
not yet fallen significantly.
Q3 2007. The ABX index of AAA
rated sub prime securities indicates losses of only 5-10% of par
value. Actual defaults and even downgrades of AAA securities are yet
to come: the infamous downgrade of nearly 2,000 AAA securities over a
mere two days came only in April 2008.
October 2008. Lenders still
believe that the best real estate lending will hold up reasonably well
and think that losses will be confined to the really low quality

If we assume that the peak to trough decline in real estate prices
in India will be comparable to what we have seen in the US, then it is
clear that most of the pain still lies ahead.


2 responses to “India is now in September 2007

  1. Bikash October 22, 2008 at 11:15 am

    The lag in the crisis is only on the housing,real estate and credit aspect of the economy.But as far as the equity markets are concerned they have corrected as much as(or may be ever more)US and European markets have.
    But if the pain is still left in the real estate sector then will it reflect in the equity markets in the same magnitude as it did in US and European markets?

  2. Mahesh October 23, 2008 at 1:04 am

    I truly admire your views for its insightfulness. Also, it helps my trading because i mix fundamentals with technicals for stocks. This blog is one of the important blogs i visit apart from ftalphaville which tells me whats happening around the world and very specifically India.
    Warm regards,

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