Project Report

Global Financial Crisis: History, Present

Situation & Impact on India

SECTION: B
COURSE: MBA 2024 - 26
SEMESTER: 3
SUBJECT NAME & CODE: International Finance and Forex Management
(FIBA713)
INSTITUTION: Amity Business School, Kolkata

GROUP MEMBERS ENROLLMENT NO.

AYUSH MUKHERJEE A91801924021
AGNIJ ADHIKARI A91801924040
VINAY JAISWAL A91801924072
PRITAM VERMA A91801924047
ANIKET SHAW A91801924158
SAGNIK RAHAMAN A91801924155
 Table of Contents
Sl. No. Topic Page No.

1 Introduction 3

2 Financial Crisis: Concepts and Characteristics 3-4

3 History of the 2008 Global Financial Crisis 4-5

4 Present Global Situation 6-7

5 Impact on India 7-8

6 India’s Response to the Crisis 8-9

7 Long-Term Impact on India 9 - 10

8 Conclusion 10 - 11

9 References 12
 INTRODUCTION
The global financial crisis 2008 was one of the worst economic disasters in modern history, on
par with the Great Depression in terms of severity and international ramifications. It
transformed the international financial architecture, questioned decades-old economic
doctrines and laid bare significant weaknesses in the global financial system. The crisis
originated in the United States (U.S.) housing sector, yet it quickly transcended borders via
linked financial flows and affected both developed economies as well as emerging economies.
The crisis was of an epic scale not seen since World War II, led to massive wealth destruction,
tens of millions of unemployed, business failure and a loss of confidence in financial institutions
and markets.
The financial crisis of 2008 is a topic that should be studied, not just by academics but also by
students, policy makers, business leaders and financial professionals. In the aftermath of the
crisis valuable lessons have been learned about risk management, financial regulation, and
excessive leverage as well as for coordinated policy responses in times of economic
emergencies. It showed just how fast financial contagion can spread in a globalized world and
it spotlighted the systemic risks big, complex financial institutions pose.
India could not remain unscathed from the financial crisis in its home and away ground,
although geopolitical reasons made sure it would not be a direct hit either. That said, India’s
performance during this unprecedented period tells an interesting story of crisis management
and economic resilience. Its banking system is relatively insulated, regulation has been sensible
and non-coercive, and policy responses have come thick and fast. This volume is a
compendium of wide-ranging research on the global financial crisis and the Indian economy,
the economic policy reforms as an outcome of immediate impacts or crises before 2008, and
changes in India's strategies that were implemented after the financial crisis.

FINANCIAL CRISIS: CONCEPTS AND CHARACTERISTICS

A financial panic is a major disruption in the functionality of a market for, or with respect to,
securities. Unlike normal market corrections, which are mild and short-lived events financial
crises are characterized by panic, sharp credit contractions and the failure of large financial
institutions. These crises can destabilize whole economies, precipitating crashes or
depressions that lead to mass unemployment, business collapse and huge reductions in living
standards.
A financial crisis exhibits several characteristics:

• The first step is usually a broad sell-off of assets in different markets, including stocks,
bonds, real estate and other investments.
• Second, furthermore, financial institutions come under severe stress or even collapse
as their assets are devalued and depositors (investors) disintermediate.
 • Third, borrowing becomes even more paralyzed in credit markets as lenders refuse to
make any loans, despite borrowers with good credit requesting them, and economic
activity falls off a cliff.
• Fourth, there has been a very sharp collapse in confidence among investors, consumers
and firms which is translating into a self-reinforcing downward spiral of negative
sentiment, pessimism and economic shrinking.
The origins of financial crises differ but can involve similar features. Too much risk taking on
the part of financial institutions, spurred by easy credit and lax regulation, is often right at the
heart of things. Bubbles in asset prices, where prices rise far above the fundamental value
driven by speculative mania and not economic conditions, are fertile ground for such dramatic
moves. Weak regulators fail to intervene when harmful behaviour persists unchecked until it is
systemic. Vulnerable economies are whipped into crises by exogenous shocks, like sudden
escalations of commodity prices, political instability, or natural calamities.
The strength and the duration of financial crises are influenced by several factors, such as the
size and interdependence of affected economies, the stability and health of their financial
institutions, effectiveness and timeliness with which governments act in response to crisis
circumstances as well the degree to which there is international collaboration in addressing the
crisis. Evidence from history indicates that a financial crisis can have lasting effects that
continue beyond the acute phase of the crisis, affecting economic growth, employment and
social welfare for many years.

HISTORY: THE 2008 GLOBAL FINANCIAL CRISIS UNFOLDS

Early 2000s US housing market developments are often blamed for the 2008 global financial
crisis. After the deflation in the dot-com bubble in 2000 and terrorist attacks on September 11,
2001, sent shockwaves through the global economy, though, interest rates across major
central banks were reduced to levels not seen before at all time low values by U.S. Federal
Reserve to inspire economic growth. These low interest rates made mortgages cheap and
eventually, with lenders increasingly lowering barriers to entry for high-leverage loans in search
of higher returns are accessible, fuelling a boom in housing purchases and a persistent climb in
home prices.
American banks aggressively lended subprime mortgages during this time. Subprime loans are
those made to homebuyers who have a history of late payments, no demonstration of income
or significant debt-to-income ratios of lendees which is too risky for standard mortgage
lending. Banks were willing to make these dangerous loans for various reasons. For one thing,
housing prices were going up and that led to the belief that even if borrowers couldn’t repay, you
could sell their property at a profit. Second, these risky loans were not being retained by banks
on their balance sheet but instead they were sold to other institutions in a process known as
securitization.
Securitization entailed aggregating procured individual mortgages into relatively opaque
financial instruments: mortgage-backed securities (MBS) and collateralized debt obligations
(CDOs). These securities were in turn sold to investors around the world, such as retirement
funds, insurance companies, banks and investment funds. The idea was that the process
should spread risk across the financial system, making it more stable. Instead, it unleashed
toxic assets on the global financial system while muddying the waters around risk entirely.
Those securities were supposed to be evaluated for risk by credit rating agencies, which
assigned many of them high ratings that implied they were as safe to own as government
bonds. Those ratings were frequently wrong because the rating businesses had bad models,
serious conflicts of interest (they were paid by the institutions whose products they rated), and
underestimated the chance that people would default on mortgages in large enough numbers
at once.
The housing bubble began deflating in 2006, when home prices stopped going up, and then
started falling. Millions of homeowners who had bought with adjustable-rate mortgages saw
the size of their monthly payments swell beyond what they could afford. Others who had
bought homes to use as investment properties or to flip at a profit suddenly found they couldn’t
sell houses that had come to be worth less than what they paid. There was a dramatic surge in
mortgage defaults and foreclosure, especially among subprime borrowers.
And the value of mortgage-backed securities collapsed as defaults mounted. Their huge
exposure to such products ultimately led to a drastic diminution in the value of financial firms
such as the pain was exacerbated because many institutions had used leverage to taking money
out of the bank, essentially to make those investments, magnifying their losses. They were also
so complicated that it was hard to tell who-the-heck was most exposed: And thus fear, seized
the entire financial system.
The crisis came to a head in September 2008 when Lehman Brothers, one of America’s oldest
and biggest investment banks, went bust. When Lehman Brothers was permitted to fail and
not be rescued by the U.S. government, it was a jolt that reverberated around global financial
markets. Investors and depositors panicked, not knowing which other major institutions might
fall. Credit markets around the world froze as banks refused to lend to one another, fearing
counterparty risk. The interbank lending market, vital for the daily operation of the financial
system, largely froze.
The effects have been immediate and calamitous across the world. Banks around the globe
reportedly lost $2.8 trillion between 2007 and 2010. The largest economies plunged into deep
recessions as economic output contracted, unemployment battered millions of people out of
their homes and work, and retirement savings vanished. The world’s economy ground almost
to a halt, with the worst downturn since the Great Depression highlighting how connected the
modern financial system had become and how rapidly issues in one place could spread
around the world.
 PRESENT SITUATION
The rebound from the 2008 financial crisis has been extended, complicated and uneven among
regions and nations. After the crisis, governments and central banks in many countries took
various measures to address the systemic risks such as bailouts of the banking sector rescuing
struggling institutions or a close by government intervention stabilising financial systems or
helping recapitalize weak companies to prevent implosion. Such measures were themselves
massive: huge fiscal stimulus packages, bailouts of banks, and innovative monetary policies
that would have been unimaginable before the crisis.
Central banks in rich countries cut interest rates almost to zero and left them there for years.
When traditional monetary policy fell short, many central banks went further with what was
known as quantitative easing of the large-scale purchase of government bonds and other
securities to inject liquidity into financial markets and press long-term rates down. The U.S.
Federal Reserve, European Central Bank, Bank of England and Bank of Japan have all done so
in various forms in trillion-dollar terms altogether at least.
Authoritative bodies introduced the wide-ranging regulatory reforms designed to avert another
crisis, and render the financial system stronger. In the US, the Dodd-Frank Wall Street Reform
and Consumer Protection Act imposed tougher rules on banks and established new supervision
procedures. Moreover, at the international level, the Basel III system provided not only higher
equity requirements but also better risk management and supervisory standards for banks.
These regulations primarily aimed at curbing excessive risk taking, increasing transparency,
protecting consumers and ensuring that institutions would not become too big to fail.
There has been a wide range in the pace of recovery by region. So-called advanced economies
like the United States have generally rebounded more vigorously, with economic growth kicking
back in, unemployment rates easing and stock markets setting new records. But that recovery
has also been marked by rising income inequality and discussions of whether the spoils of
recovery have been shared fairly. Europe had other challenges – the sovereign debt crisis rocked
more than one in Europe and posed legitimacy issues for the common currency.
Economic giants such as India, China, Brazil and other countries have become new engines of
world growth in the post-crisis period. Nevertheless, the region’s economies continue to be
exposed to external shocks, including possible changes in capital flows or commodity prices
as well as potential trade policy challenges for several higher-income markets. The crisis
demonstrated the need for strong domestic markets, diversified economic structure and
adequate foreign exchange reserves to counteract external volatility.
Events recently have shown that a level of financial market volatility and uncertainty regarding
the economic growth outlook remains. The eurozone debt crisis, which followed the 2010–11
Greek government-debt crisis and was characterized by severely high debt-to-GDP ratios in
some PIIGS countries, and during which there were widely spread fears of a possible breakup
of the eurozone. Trade friction among the large economies has added to uncertainty. Arguably
most importantly, the pandemic being faced by humanity that first emerged in 2020 has driven
yet another brutal such global economic crisis requiring unparalleled government policy
intervention and leaving continued weaknesses plainly exposed within the global economic
model. By the same token - though substantial reforms have been implemented to improve
financial sector and regulatory capacity, recent events reveal how vulnerable the global
economy is to shocks of all sorts.

IMPACT ON INDIA
The 2008 Global Financial Crisis and the Experience of India the Indian experience during the
2008 global financial crisis was in sharp contrast to many other countries on account of strong
banking practices and sensible regulation. The Indian banking system remained relatively
unaffected by the global financial crisis, compared to many western nations whose economies
were so badly affected that they needed government bailouts. That resilience had been the
result of many reasons that have defined Indian banking over the decades.
Indian banks (mostly PSU) worked with traditional lending practices such as relying on the
borrower’s credit worthiness, appropriate security coverage and prudent level of leveraging.
Indian banks, unlike their Western counterparts, were hardly touched by the toxic subprime
mortgage-backed securities that wreaked havoc abroad. The Reserve Bank of India to this day
had kept tight leashes on banks overseas operations and derivative trading, which effectively
circumscribed their role in such exotic and dodgy financial products. Indian banks also had
higher capital adequacy ratios than the minimum levels that were required internationally, thus
offering a more solid buffer to cushion any losses.
But saying India is entirely insulated from the meltdown would be a lie. There were large effects
of “second round” or indirect nature transmitted through several channels that linked Indian
economy with the world markets. It confirmed that, in the great new era of globalisation, no
country is left unaffected by major international economic shocks.
Export was one of the most seriously affected segments for the Indian economy. Indian exports
plummeted as the demand in developed economies collapsed. Key export industries such as
textiles, gems and jewellery leather goods and information technology services saw their
exports fall by between 20 to 30 per cent. Textile companies in places like Tirupur and Ludhiana
reported cancellation of orders, delayed payments and were left with no choice but to scale
down their operations or close them. In Mumbai and Surat, the storm all but ended export
orders for gem and jewellery manufacturers as consumer enthusiasm for luxury goods in
Western markets dried up.
India’s biggest growth contributors, the IT and business process outsourcing industry also ran
into headwinds. Several MNCs scaled at back IT spending and outsourcing budgets due to their
own financial issues. This has resulted in sluggish growth in revenues, a slow-down in hiring,
and layoffs for India's IT sector. The crisis also exposed India's export-oriented sectors to
vagaries of global demand.
This money coming into Indian capital markets made India a favourite destination for FII capital
during the previous year, but when these foreign funds need to cover their losses and margin
calls in their home markets, they pull out of India with equal vengeance. Foreign portfolio
investment was in the negative totalling billion dollars during these crisis months.” India’s stock
market, as measured by the Sensex, crashed more than 50% from its peak in January 2008 to
its trough in March 2009; substantial wealth was wiped out, investor confidence was rattled.
The market collapse hurt not only the rich, but also middle-class families who were coming to
rely on owning stocks directly or through mutual funds.
The Indian rupee weakened sharply versus the major currencies, led by the US dollar, as foreign
exchange outflows picked up and global risk aversion increased. The rupee tumbled from about
Rs. 39-40 per dollar in early 2008 to almost Rs. 52 per dollar by March 2009. The depreciation
of the peso simply made imports more expensive, added to inflationary pressures and put a
strain on businesses who used imported inputs from raw materials to machinery and
components. But it also made Indian exports cheaper, partly compensating for weaker global
demand.
India's GDP growth rate, which had averaged over 9 per cent in the years just before crisis,
slumped to around 6.7 percent in 2008-09. This growth rate was still positive and enviable in
comparison to the negative growth that many developed economies were experiencing, but it
proved to be a serious drag on India's economic momentum and development goals. Regions
and areas relying on export-oriented industries were especially hard hit by the crisis, resulting
in unemployment, subsistence allowance receipt, and worsening poverty.

INDIA'S RESPONSE TO THE CRISIS

The Indian government and the Reserve Bank of India acted quickly and decisively to cushion
the economic fallout of the catastrophe. Their multifaceted initiative including monetary policy,
fiscal stimulus and sectorial support provided a lesson in the necessity to have a coordinated
policy action in times of economic crisis.
Reserve Bank of India adopted an accommodative monetary policy to foster economic activity
while ensuring price and financial stability. The rates were brought down gradually by
consecutive cuts in repo rate, reverse repo rate and cash reserve ratio (CRR). These rate cuts
meant that businesses and consumers could borrow more cheaply, which would foster
investment and demand. The RBI also resorted to open market operations to infuse liquidity in
the banking system so that banks can lend to each other. Special refinance arrangements were
provided for export sectors and SMEs having difficulties in obtaining finance.
The government rolled out two rounds of the comprehensive fiscal stimulus packages totalling
about Rs. 186,000 crore (then around $40 billion). These included a bumper government
spending package on road, railway and rural development programmes. The National Rural
Employment Guarantee Scheme (NREGS) was extended to provide ‘employment’ to rural
households that have been hit by the slow down. There was also a decrease in personal
income tax, and on excise duty on a range of goods to increase consumption. Duty drawback
schemes and improved access to credit offered extra help to sectors driving exports.
The strict and conservative banking regulations that had at times been derided as overly
cautious or restrictive in India before the crisis turned out to be India’s strong suit during this
period. Unlike Western nations, which had to bail their insolvent banks out with tens of billions
in taxpayer money, Indian banks were fundamentally solid and profitable throughout the crisis.
In India, the risk-averse approach to regulation by RBI that had capped public sector banks’
exposure to risky derivatives and maintained higher capital adequacy requirements limited its
systemic exposure to the sort of banking crisis that ruined other economies.
The government had focused on boosting domestic consumption as a driver of growth, while
acknowledging India’s huge domestic market could act as a shield against the global
headwinds. Measures were taken to lift consumer confidence, purchasing power and demand
for goods and services. While other countries adopted similar protectionist policies only to slide
deeper into recession, India’s internal focus and commitment to infrastructure saved the
economy from negative growth and proved the importance of balanced development strategies
that are not overly dependent on exports or foreign capital.

LONG-TERM IMPACT ON INDIA

Several long-term impacts on India's economic structure, policies, and institutional
arrangements emerged from the 2008 financial crisis. India’s economy did face difficulties due
to the crisis but there were positive outcomes like increasing India's Economic Resilience and
Policy Capabilities.
The crisis demonstrated the vital necessity, in bad days as much as in good ones, of having a
healthy home market to fall back on. “The very fact that India is a large and populous country
with a relatively large middle class meant that we have domestic consumption as also external
demand, which could act as a cushion in the sense that one of them can compensate for what
was happening to the other,” he said. Economic policies thereafter have consistently focused
on raising domestic demand through income support, infrastructure development, financial
inclusion and rural consumption enhancement among others. This orientation toward the
domestic market has lessened India's exposure to the vagaries of the global economy.
The crisis spurred accelerated financial reforms in regulation and risk management. The RBI
also put in place special alert systems for better monitoring of systemic risks. Capital
requirements were reinforced, and the stress testing of banks was stepped up and extended.
banks that functioned as the predominant source of funding for new construction projects here
in Victoria, had developed more effective risk assessment abilities and were becoming
increasingly wary of being overexposed in complex financial instruments. Different aspects of
corporate governance were further developed and increased disclosure was required to
achieve more transparency.
India intensified its efforts on diversification of the export markets and product baskets to
minimise over-reliance on conventional Western markets. The authorities encouraged trade
links with other developing countries, with African states and Latin American nations. There
was greater emphasis on regional trade agreements and bilateral economic links. At the same
time, there were attempts to go up in manufacturing as well as services through innovation,
quality and branding to reduce the risk of price competition and improve competitive edge
globally.
The crisis has surmounted the institutional capacity of India for the management of crisis and
policy coordination. The coordination arrangements involving the Ministry of Finance, the
Reserve Bank of India and other regulators were strengthened. Economic monitoring
frameworks were improved to deliver more timely information on critical variables. The crisis
also trained a spotlight on financial inclusion, as policymakers realized that the more people in
the broader financial system, the more stable and resilient it could be.
India's relative success in managing the crisis made it a better player on the international stage.
An effectively managed banking system, a strong domestic market and agile policy responses
were such that it became a lot more visible to global investors that India had sound
fundamentals and capable institutions. The one led to India receiving additional investment
from outside the country and helped it for further progress in economic development. India's
representation in international economic bodies increased in line with its emergent status in
the world economy.

CONCLUSION
The 2008 investment panic was a turning point for economic history, when what policymakers
and the broader public believed they knew about financial market dynamics, regulatory
strategies, and economic management were turned upside down. Beginning in irresponsible
lending and excess risk-taking by the banks, the crisis expanded into a global phenomenon with
the economies of nations falling virtually simultaneously in late 2008 and early 2009 from
already relatively high levels of economic growth. The collapse of some of our largest financial
institutions, the failure of credit markets, and unprecedented falls in global economic activity
demonstrated the interconnectedness of our modern financial system and revealed systemic
weaknesses that have been allowed to develop over years as a result of lax regulation and
policy.
India’s experience in this unparalleled crisis has important lessons to be learned for economic
management, policy shaping and institutional making. The country's sound financial
regulations, conservative banking practices, good supervisory framework and large domestic
market shielded it from the worst of the crisis. India certainly suffered indirect effects in the
form of falling exports, capital outflows, a weak currency and slower growth, but these
secondary repercussions were less devastating than they were for many advanced economies
whose financial systems found themselves at the heart of the crisis.
The decisive and coordinated policy actions of the Reserve Bank of India (RBI) and the
government have ensured that certain sectors, including aviation, power, construction, and real
estate, are staring in the face of disaster. The simultaneous monetary policy relaxation, fiscal
easing and sectoral support with strong focus on domestic demand proved the efficacy of a
holistic policy response in managing crisis. The Indian experience affirmed the need for
regulatory and surveillance vigilance even in times of boom, and underscored the benefits of
having institutions that are driven by long-term stability rather than short-term profit.
The crisis underscored certain general principles of sustainable economic development that
are as valid today. One: financial regulation and supervision should be strong, comprehensive,
and forward-looking to prevent excessive risk-taking and to safeguard systemic stability. The
benefits of deregulated financial innovation, as shown by the crisis, cannot possibly have
outweighed the costs. Second, economies that are diversified and have well-developed
domestic markets, multiple engines of growth, and balanced exposure to international trade are
more robust in the face of external shocks than those that rely too heavily on any one sector or
market.
A third is firm and timely policy action that not only minimizes the length and extent of economic
crises, but also prevents some from occurring. The role of institutional capacity, policy
coordination mechanisms, and strong leadership cannot be overstated. Fourth, international
cooperation and coordination is necessary in an interdependent global economy as the effect
of financial contagion can sweep across economies through pairwise interactions. No nation
can be entirely shielded from global economic tremors, so international policy why is the
government impacting the economy and information exchange are key.
For a fast-developing India, which dreams to be one of the handfuls of major global economic
powers, these lessons from the 2008 crisis are more relevant than ever. The country needs to
keep the regulatory guard up in finance, gritting against proposals to relax standards in order to
get short-term growth. Ongoing investments in the domestic economy both in infrastructure,
education, and skills development as well as broad-based inclusive growth would make it more
resilient to further shocks. There needs to be export market, product and economic activity
diversification to minimize exposure to cooling in any one sector or part of the country.
The creation and sustainability of strong institutions for economic management, surveillance
and crisis resolution must continue to be at the top of the policy agenda. That means investing
in the ability to collect and analyse data, training expert staff, and ensuring that regulators are
sufficiently independent and resourced with the right powers to perform their roles effectively.
The confidence and credibility acquired from having managed the crisis of 2008 with success
has been invaluable, yet complacency would be short-sighted in a world where new risks and
challenges appear daily.
There is not a single person involved in policy making, financial management, or business
leadership who can afford to remain blind to the intricacies and facts of the 2008 global
financial crisis. The crisis contains treasurable lessons about risk-taking, regulatory soundness,
too much leverage and complexity in financial systems and the imperative for balanced
economic growth. In conclusion, the new global economy puts us in a precarious situation and
changes our perspective on economic problems so that whatever we learn from this crisis will
be useful for preparing against and minimizing future crises in a world of increased complexity
and interconnectedness.
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