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US subprime crisis may depress stock markets: Economist

US subprime crisis may depress stock markets: Economist
PTI
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First Published: Tue, Sep 18 2007. 11 36 AM IST
Updated: Tue, Sep 18 2007. 11 36 AM IST
New Delhi: The ongoing US subprime mortgage crisis is likely to depress the Indian stock markets in addition to creating cash flow problems for the corporate, warns a study conducted by the UK-based magazine The Economist.
In the event of a dramatic tightening of credit, some of the sources of capital like Foreign Institutional Investors, Foreign Direct Investment and External Commercial Borrowing, could dry up.
Portfolio inflows by FIIs could reverse rapidly in the event of a flight to safety, exerting pressure on share prices, said the Economist Intelligence Unit (EIU) report on the impact of US subprime mortgage crisis on global economy.
Drying up of sources of funding would make it difficult for Indian companies to raise money through other channels, the EIU report titled ‘Heading for the rocks: Will financial turmoil sink the world economy?´, said, adding, asset bubbles almost always end in tears, and the US housing market is no exception.
The enormous amounts that Indian firms have borrowed overseas recently could also create cash flow problems in case the borrowers fail to roll over or restructure the debts, the report said. It could deal a blow to Indian companies’ ambition to make domestic or foreign acquisitions.
India, as the third largest Asian economy after Japan and China, has received large capital inflows which include portfolio investment, foreign direct investment and receipts from external borrowings by aggressively expansion-minded domestic firms.
A potential mitigating factor, the report added, is the inflows from the non-resident Indian (NRIs) which are less likely to dry up in part because of the NRIs’ emotional attachment to their country of origin and also because of the high interest rates available in here.
Referring to the US subprime crisis caused by excessive surge in property value which zoomed to $12 trillion the report said banks and investors were being punished for ignoring risk and lending recklessly.
With regard to the impact on subprime crisis, it added, as borrowers default on their mortgages, the panic has spread, paralysing parts of the financial system and threatening to undermine the global economy.
The precise impact on Asia would depend on the severity of any global economic downturn or credit squeeze, the report said, adding it will have implications for the financial sector and the real economy.
The report also said while the fallout from the subprime sector remains largely a financial story for now, it would also hurt Asian exports on account of a possible slowdown of the US imports. PTI CSA potential mitigating factor, the report added, is the inflows from the non-resident Indian (NRIs) which are less likely to dry up in part because of the NRIs’ emotional attachment to their country of origin and also because of the high interest rates available in here.
Referring to the US subprime crisis caused by excessive surge in property value which zoomed to $12 trillion the report said banks and investors were being punished for ignoring risk and lending recklessly.
With regard to the impact on subprime crisis, it added, as borrowers default on their mortgages, the panic has spread, paralysing parts of the financial system and threatening to undermine the global economy.
The precise impact on Asia would depend on the severity of any global economic downturn or credit squeeze, the report said, adding it will have implications for the financial sector and the real economy.
The report also said while the fallout from the subprime sector remains largely a financial story for now, it would also hurt Asian exports on account of a possible slowdown of the US imports.
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First Published: Tue, Sep 18 2007. 11 36 AM IST