CH:-1 INTRODUCTION

Different countries or regions, like the Eurozone, U.S.A., and India use different

currencies. These currencies generally float against each other, meaning that their relative

prices are set by traders on foreign exchange markets, although sometimes they are fixed

(meaning just that the central bank acts on the market to keep its exchange rate where it

wants it). Changes in exchange rates are normal and are driven by a number of factors,

such as interest rates in different countries: a higher interest rate creates demand for a

currency, and as with most things higher demand leads to a higher price meaning that

currency has greater value. More generally, a currency’s value should be related to the

long-term attractiveness of the economic opportunities available in that currency.

There is no exact definition of a financial crisis, but it generally involves a rapid fall in

the value of one or more currencies. It is more likely to happen in an emerging market

economy that has borrowed a lot of money in foreign currency. For E.G. If I’m a big

Indian institutional investor, I may not want to buy bonds denominated in American

dollar, because I don’t know what the dollar will be increasing in the future, but I may be

willing to buy bonds denominated in dollar.

v What is financial crisis?

A situation in which the value of financial institutions or assets drops down rapidly. A

financial crisis is often associated with a panic or a run on the banks, in which investors

sell off assets or withdraw money from savings accounts with the expectation that the

value of those assets will drop if they remain at a financial institution.

In financial crisis mainly three things happens.

1. Investors withdraw their money from savings accounts

2. An economy of country may falls down.

3. A stock market may crash down.

A financial crisis is defined as speculative pressures in the foreign exchange markets. To

identify periods of a currency crisis, we need to identify both successful and unsuccessful

speculative attacks on domestic currency. The basic idea is that when there are

speculative runs on currency, the government has three policy choices.

1. Government can make exchange rate depreciate. This is successful currency attack

since the monetary authority gives up a pegged exchange rate system after a series

of speculative attack.

2. Government can intervene in the foreign exchange markets by selling international

reserves.

3. It can be increase interest rates to increase capital flows to decrease speculative

pressure on domestics currency and market

Some countries may use a combination of these three policy options to absorb speculative

pressures or attacks.

History itself is a witness of major financial crisis European Monetary System

(EMS) crisis 1192-1993, the Mexican crisis in 1994–1995 (which is spread to a number

of South American countries), and the Asian crisis in 1997–1998.

CH:-2 Review of literature

1. The impact of global financial crisis on India’s Gross Domestic Product (GDP) is

investigated upon in an aggregate demand framework using quarterly data for the

period from Q2 of 1996 to Q1 of 2010. GDP, consumption expenditure, capital

formation and export were found to be co-integrated. Co-integration estimation re-

affirms that domestic consumption remains the key driver of India’s GDP growth.

Our analysis establishes thatthough India’s trade sector dwindled and investment

activity declined in the aftermath of global financial crisis, its GDP growth

slackened only marginally as domestic consumption provided the necessary buffer

in limiting the adverse impact of global financial crisis on the Indian economy.

-Raj Rajesh, SanjibBordoloi

(2008)

2. The turmoil in the international financial markets of advanced economies that

started around mid-2007 has exacerbated substantially since August 2008. The

financial market crisis has led to the collapse of major financial institutions and is

now beginning to impact the real economy in the advanced economies. As this

crisis is unfolding, credit markets appear to be drying up in the developed world.

With the substantive increase in financial globalization, how much will these

developments affect India and other Asian emerging market economies (EMEs)?

India, like most other emerging market economies, has so far, not been seriously

affected by the recent financial turmoil in developed economies. In my remarks

today, I will, first, briefly set out reasons for the relative resilience shown by the

Indian economy to the ongoing international financial markets’ crisis. This will be

followed by some discussion of the impact till date on the Indian economy and the

likely implications in the near future. I then outline our approach to the

management of the exposures of the Indian financial sector entities to the collapse

of major financial institutions in the US. Orderly conditions have been maintained

in the domestic financial markets, which is attributable to a range of instruments

available with the monetary authority to manage a variety of situations. Finally, I

would briefly set out my thinking on the extent of vulnerability of the Asian

economies, in general, to the global financial market crisis.

-Global Financial Crisis and Key Risks Impact on India and Asia

Rakesh Mohan

(October 9, 2008)

CH:-3 RESEARCH METHODOLOGY

v PROBLEM STATEMENT:

To focus on the study of examine “U.S. financial crisis and its impact on India affecting by macroeconomic factors.”

v RESEARCH QUESTIONS:

1. How the U.S. financial crisis affects Gross Domestic Products (GDP)?

2. How the U.S. financial crisis affect balance of payment (BOP)?

3. Is Foreign Direct Investment (FDI) and foreign Institutional Investment (FII) is

affected by U.S. financial crisis?

4. What policy is followed by the government while financial crisis (Indian)?

v RESEARCH OBJECTIVES :

1. To know the effect of financial crisis on FII and FDI.

2. To know how financial crisis affect the GDP and BOP.

v LIST OF INFORMATION NEEDED:

1. Data of balance of payment since 2007 to 2012.

2. Data of GDP growth rate from 2007 to 2012.

3. Data of FDI and FII from 2007 to 2012.

4. Data of American stock market indices (Dow Jones) needed from 2007 to

2012.

v Hypothesis:

H0 1: There is no relationship between Dow Jones and NSE indices.

H1 1: There is significance relationship between Dow Jones and NSE indices.

H0 2: There is no relationship between GDP and BOP.

H0 2: There is significance relationship between GDP and BOP.

v VARIABLES:

A. Independent variables:

1. American Stock market (Dow Jones)

B. Dependent variables:

1. GDP (Gross Domestic Product)2. BOP (Balance Of Payment)

C. Interdependent variables :1. FDI (Foreign Direct Investment)2. FII ( Foreign Institutional Investment)

v RESEARCH DESIGN:

For this research researcher used the ‘Descriptive Research Design’, as name

suggests; the main objective is to describe the situation of global financial crisis

and its impact on India .At this stage the researcher builds some idea about

sampling methods.

v DATA COLLECTION

1. That data are collected from various website for making concept very clear.

2. The period of data collected is from year 2007 to 2012.

3. This period is selected for the study because at least 5 years data are required for

understanding the relationship between the variables.

4. The data collected are of interval scale.

¸ Analysis of secondary data computing following tools:

Multiple Regression Analysis, multiple co-relations Analysis.

The reasons for applying the above tests are:

A. The data are interval in nature.

B. There is 1 dependent, 2 independent and 2 are interdependent variable.

To know the predictability of dependent variables from independent variable

v DATA ANALYSIS PLAN:

Data will be analyzed using SPSS (Statistical Package for Social Sciences) package v

16.0 by IBM. The data analysis tools applied here are Multiple Regression Analysis.

v SCOPE AND BENEFITS OF THE STUDY:

1. This study seeks to provide the information of financial crisis which occurs in

2008.

2. It is found that whether the macroeconomic factors influence the crisis or not.

v LIMITATIONS TO THE STUDY:

1. There are many other factors which affect the financial crisis. In this report the

researchers have just taken six factors namely Balance of Payment, GDP, FII,

FDI, Export and Imports.

2. Time, money, energy are scarce resource and hence major constraints.

3. Due to lack of experience on researcher’s side, there is a possibility of human

error.

4. The findings and suggestion is may be relevant with time.

5. We have considered American stock market as only Dow Jones not any Other.

Ch4:- DATA ANALYSIS AND INTERPRETATION

1. Multiple Correlation:-

Descriptive Statistics

Mean Std. Deviation N

DOW_JON_OP_IND 1.143648E

41.6817835E3 70

NSE_op_IND 4.831928E

3857.1231783 70

FDI_IN_USD 2.81E4 13495.149 6

FII_IN_RS 4.013337E

46.7897178E4 6

GDP_IND 7.550 2.0226 6

bop_QTR_ind -

1.049083E

4

9.1191496E3 21

Correlations

DOW_JON_O

P_IND

NSE_op_I

ND

FDI_IN_US

D FII_IN_RS GDP_IND bop_QTR_ind

DOW_JON_OP_IND Pearson

Correlation1 .539** -.548 -.407 -.169 .677**

Sig. (2-tailed) .000 .260 .423 .750 .001

N 70 70 6 6 6 21

NSE_op_IND Pearson

Correlation.539** 1 -.493 -.733 -.328 -.104

Sig. (2-tailed) .000 .321 .098 .526 .655

N 70 70 6 6 6 21

FDI_IN_USD Pearson

Correlation-.548 -.493 1 -.195 -.131 -.196

Sig. (2-tailed) .260 .321 .711 .804 .710

N 6 6 6 6 6 6

FII_IN_RS Pearson

Correlation-.407 -.733 -.195 1 .644 .265

Sig. (2-tailed) .423 .098 .711 .168 .612

N 6 6 6 6 6 6

GDP_IND Pearson

Correlation-.169 -.328 -.131 .644 1 .618

Sig. (2-tailed) .750 .526 .804 .168 .191

N 6 6 6 6 6 6

bop_QTR_ind Pearson

Correlation.677** -.104 -.196 .265 .618 1

Sig. (2-tailed) .001 .655 .710 .612 .191

N 21 21 6 6 6 21

**. Correlation is significant at the 0.01 level (2-tailed).

Interpretation: The above table shows correlation between variables. Dow Jones is strongly correlated with NSE (0.539) indices and BOP (.0677) and negatively correlated with FDI (0.-548), FII (-0.407) and GDP(-0.169).

2. Multiple Regression:

Model Summaryc

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate

1 .169a .028 -.214 2.2290

2 .363b .131 -.448 2.4335

a. Predictors: (Constant), DOW_JON_OP_IND

b. Predictors: (Constant), DOW_JON_OP_IND, NSE_op_IND

c. Dependent Variable: GDP_IND

Interpretation: The above table shows linear regression equation according to above summery table model 2 is the best for predicting the dependent variable because in model 2 R and R square is grater then 1st model.

3. Anova:

ANOVAc

Model Sum of Squares df Mean Square F Sig.

1 Regression .581 1 .581 .117 .750a

Residual 19.874 4 4.968

Total 20.455 5

2 Regression 2.690 2 1.345 .227 .809b

Residual 17.765 3 5.922

Total 20.455 5

a. Predictors: (Constant), DOW_JON_OP_IND

b. Predictors: (Constant), DOW_JON_OP_IND, NSE_op_IND

c. Dependent Variable: GDP_IND

Interpretation: The above table shows the analysis of variance that the significance value of both models is 0.750 and 0.809 that is more than 0.5 so that it is fail to accept H01.

Findings

1. There is strongly positive relationship between Dow Jones, NSE indices and BOP and negative relationship between FII, FDI and GDP with respect of Dow Jones as independent variables which mean increase or decrease of one variable affected to other.

2. The multiple Regression model used for predicting the dependent variable that is GDP (GROSS DOMESTIC PRODUCT) so that in model 2 the value of R and adjusted R is high so model 2 is best.

3. The ANOVA table shows that the significance level of model 1 (0.750) and model 2 (0.809) both are higher than0.5 so we fail accepting the H0 1 that is there is no relationship between Dow jones and NSE indices.

Conclusion

India is now fastest growing country but India’s economy was fall down in 2008 financial crisis when majority of foreign institutional investment (FII) was driven out after the receiving 17.7 billion dollars net equity investment inflow in 2007.

This was the most probably reason for crashing economy is major financial institution of America is registered bankruptcy. After the crashing Indian economy are stabilized and able to receive growth rate (GDP) of 6.77 in 2009, 10.09 in 2010 and 7.2 in 2011.

But it is now around 5 to 6 % in 2012 due to Eurozone sovereign debt crisis. It’s affected by declaration of export, current account deficit. Government of India is takes action to fulfill the deficit by attracting foreign investors.