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The combined impact of the reversal of portfolio equity flows, the reduced availability of international capital both debt and equity, the perceived increase in the price of equity with lower equity valuations, and pressure on the exchange rate, growth in the Indian corporate sector is feeling some impact of the global financial turmoil.

The monetary and fiscal package given by the Government and The RBI has given stimulus to maintain growth On the other hand, on a macro basis, with external savings utilisation having been low traditionally, between one to two percent of GDP, and the sustained high domestic savings rate, this impact can be expected to be at the margin. Moreover, the continued buoyancy of foreign direct investment suggests that confidence in Indian growth prospects remains healthy. The economy of each and every nation, whether big or small is facing the turmoil.

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Asia and Europe being most closely linked with US have faced the direct heat due to subprime crisis . The volatility of market and uncertainty which gripped the world around is surely going to have long lasting consequences. Whether its India, China, Singapore or any other Asian country, financial market of each and every economy has registered recession due to the US meltdown. The subprime crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage problems and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe.

The crisis which has its root in the end of the 20th century, became apparent in 2007 and has exposed weakness in the financial industry regulation and the global finance system. Many USA mortgages issued in recent years are subprime, meaning that little or no downpayment was made, and that they were issued to households with low incomes and assets, and with troubled credit histories. When USA house prices began to decline in 2006-07, mortgage default increased, and securities backed with subprime mortgages, widely held by financial firms, lost most of their value.

The result has been a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world. The crisis began with the bursting of the United States housing bubble and high default rates on “subprime” and adjustable rate mortgages (ARM), beginning in approximately 2005-2006. Government policies and competitive pressures for several years prior to the crisis encouraged higher risk lending practices.

Further, an increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favourable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006-2007 in many parts of the U. S. , refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher.

Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1. 3 million U. S. housing properties were subject to foreclosure activity, up 79 percent; from 2006. Financial products called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, had enabled financial institutions and investors around the world to invest in the U.S. housing market.

Major banks and financial institutions had borrowed and invested heavily in MBS and reported losses of approximately US$435 billion as of 17 July 2008. The liquidity and solvency concerns regarding key financial institutions drove central banks to take action to provide funds to banks to encourage lending to worthy borrowers and to restore faith in the commercial paper markets, which are integral to funding business operations.

Governments also bailed out key financial institutions, assuming significant additional financial commitments. The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. These actions were designed to stimulate economic growth and inspire confidence in the financial markets.

Effects on global stock markets due to the crisis have been dramatic. Between 1 January and 11 October 2008, owners of stocks in U. S. corporations had suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40 percent. Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine.

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